UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
 
FORM 20-F
 
(Mark One)
 
o
Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934.
Or
 
x
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the fiscal year ended May 31, 2010.
Or
 
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ________ to ________.
Or
 
o
Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Date of event requiring this shell company report ______________________.
 
Commission file number 001-32001
 
LORUS THERAPEUTICS INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Canada
(Jurisdiction of Incorporation or Organization)
 
2 Meridian Road
Toronto, Ontario, Canada
M9W 4Z7
(Address of Principal Executive Offices)
 
Elizabeth Williams
Telephone: (416) 798-1200
Facsimile: (416) 798-2200
2 Meridian Road
Toronto, Ontario, Canada
M9W 4Z7
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
Name of Each Exchange On Which Registered
Common Shares
Toronto Stock Exchange
 
Securities registered or to be registered pursuant to Section 12(g) of the Act:  None
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:  None
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
 
Common Shares, without par value at May 31, 2010: 9,933, 454
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes  o   No  x
 
If this is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
Yes  o   No  x
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes  x   No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes o   No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.
 
U.S. GAAP o
International Financial Reporting Standards as issued by the International Accounting Standards Board o
Other x
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
 
Item 17  o   Item 18  x
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes  o   No  x
 


 
 

 

TABLE OF CONTENTS
 

 
   
PAGE
 
PART I
    3  
    ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
    3  
    ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
    3  
    ITEM 3.
KEY INFORMATION
    3  
    ITEM 4.
INFORMATION ON THE COMPANY
    16  
    ITEM 4A.
UNRESOLVED STAFF COMMENTS
    34  
    ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    34  
    ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    57  
    ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    72  
    ITEM 8.
FINANCIAL INFORMATION
    74  
    ITEM 9.
THE OFFER AND LISTING
    74  
    ITEM 10.
 ADDITIONAL INFORMATION
    75  
    ITEM 11.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
    88  
    ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    88  
PART II
    89  
    ITEM 13.
DEFAULTS, DIVIDENDS, ARREARAGES AND DELINQUENCIES
    89  
    ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    89  
    ITEM 15.
CONTROLS AND PROCEDURES
    89  
    ITEM 16.
[RESERVED]
    90  
    ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
    90  
    ITEM 16B.
CODE OF ETHICS
    90  
    ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
    90  
    ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    91  
    ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    91  
PART III
    92  
    ITEM 17.
FINANCIAL STATEMENTS
    92  
    ITEM 18.
FINANCIAL STATEMENTS
    92  
    ITEM 19.
EXHIBITS
    93  

 

 

 

 

 
 

 

General
 
On July 10, 2007 (the ”Arrangement Date”), Lorus Therapeutics Inc. completed a plan of arrangement and corporate reorganization with, among others, 4325231 Canada Inc. (now Global Summit Real Estate Inc.), formerly Lorus Therapeutics Inc. (“Old Lorus”), 6707157 Canada Inc. and Pinnacle International Lands, Inc. (the “Arrangement”). As a result of the plan of arrangement and reorganization, among other things, each common share  of Old Lorus was exchanged for one of our common shares and the assets (excluding certain future tax assets and related valuation allowance) and liabilities of Old Lorus (including all of the shares of its subsidiaries) were transferred, directly or indirectly, to our corporation and/or our subsidiaries. We continued the business of Old Lorus after the Arrangement Date with the same officers and employees and continued to be governed by the same directors as Old Lorus prior to the Arrangement Date.  In this Annual Report on Form 20-F, all references to “Lorus” the “Corporation”, the “Company”, “we”, “our”, “us” and similar expressions, unless otherwise stated, are references to Old Lorus prior to the Arrangement Date and us after the Arrangement Date.  References to this “Form 20-F” and this “Annual Report” mean references to this Annual Report on Form 20-F for the year ended May 31, 2010.
 
We use the Canadian dollar as our reporting currency. All references in this Annual Report to “dollars” or “$” are expressed in Canadian dollars, unless otherwise indicated. See also “Item 3. Key Information” for more detailed currency and conversion information. Our consolidated financial statements, which form part of the Annual Report, are presented in Canadian dollars and are prepared in accordance with accounting principles generally accepted in Canada (“Canadian GAAP”) which differ in certain respects from accounting principles generally accepted in the United States (“U.S. GAAP”). The differences between Canadian GAAP and U.S. GAAP, as they relate to our business, are explained in the Supplementary Information included with the Financial Statements included in this Annual Report.
 
Special note regarding forward-looking statements in this Annual Report
 
This Annual Report may contain forward-looking statements within the meaning of securities laws.  Such statements include, but are not limited to, statements relating to:

 
Ÿ
our ability to obtain the substantial capital required to fund research and operations;
 
Ÿ
our plans to obtain partners to assist in the further development of our product candidates;
 
Ÿ
our expectations with respect to existing and future corporate alliances and licensing transactions with third parties, and the receipt and timing of any payments to be made by us or to us in respect of such arrangements;
 
Ÿ
our expectations regarding future financings;
 
Ÿ
our plans to conduct clinical trials and pre-clinical programs;
 
Ÿ
the length of clinical trials;
 
Ÿ
the partnering potential of our products;
 
Ÿ
our business strategy;
 
Ÿ
our expectations regarding the progress and the successful and timely completion of the various stages of our drug discovery, pre-clinical and clinical studies and the regulatory approval process;
 
Ÿ
our plans, objectives, expectations and intentions; and
 
Ÿ
other statements including words such as “anticipate”, “contemplate”, “continue”, “believe”, “plan”, “estimate”, “expect”, “intend”, “will”, “should”, “may”, and other similar expressions.

Such statements reflect our current views with respect to future events and are subject to risks and uncertainties and are necessarily based upon a number of estimates and assumptions that, while considered reasonable by us are inherently subject to significant business, economic, competitive, political and social uncertainties and contingencies. Many factors could cause our actual results, performance or achievements to be materially different from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements, including, among others:
 
 
Ÿ
our ability to continue to operate as a going concern;
 
Ÿ
our ability to obtain the substantial capital required to fund research and operations;

 
1

 


 
Ÿ
our lack of product revenues and history of operating losses;
 
Ÿ
our early stage of development, particularly the inherent risks and uncertainties associated with (i) developing new drug candidates generally, (ii) demonstrating the safety and efficacy of these drug candidates in clinical studies in humans, and (iii) obtaining regulatory approval to commercialize these drug candidates;
 
Ÿ
our ability to recruit patients for clinical trials;
 
Ÿ
the progress of our clinical trials;
 
Ÿ
our liability associated with the indemnification of Old Lorus and its directors, officers and employees
 
Ÿ
our ability to find and enter into agreements with potential partners;
 
Ÿ
our drug candidates require time-consuming and costly preclinical and clinical testing and regulatory approvals before commercialization;
 
Ÿ
clinical studies and regulatory approvals of our drug candidates are subject to delays, and may not be completed or granted on expected timetables, if at all, and such delays may increase our costs and could delay our ability to generate revenue;
 
Ÿ
the regulatory approval process;
 
Ÿ
our ability to attract and retain key personnel;
 
Ÿ
our ability to obtain patent protection and protect our intellectual property rights;
 
Ÿ
our ability to protect our intellectual property rights and to not infringe on the intellectual property rights of others;
 
Ÿ
our ability to comply with applicable governmental regulations and standards;
 
Ÿ
development or commercialization of similar products by our competitors, many of which are more established and have greater financial resources than we do;
 
Ÿ
commercialization limitations imposed by intellectual property rights owned or controlled by third parties;
 
Ÿ
our business is subject to potential product liability and other claims;
 
Ÿ
our ability to maintain adequate insurance at acceptable costs;
 
Ÿ
further equity financing may substantially dilute the interests of our shareholders;
 
Ÿ
changing market conditions; and
 
Ÿ
other risks detailed from time-to-time in our ongoing quarterly filings, annual information forms, annual reports and annual filings with Canadian securities regulators and the United States Securities and Exchange Commission, and those which are discussed under the heading “Risk Factors”.
 
Should one or more of these risks or uncertainties materialize, or should the assumptions set out in the section entitled “Risk Factors” underlying those forward-looking statements prove incorrect, actual results may vary materially from those described herein.  These forward-looking statements are made as of the date of this Annual Report or, in the case of documents incorporated by reference herein, as of the date of such documents, and we do not intend, and do not assume any obligation, to update these forward-looking statements, except as required by law.  We cannot assure you that such statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements.  Investors are cautioned that forward-looking statements are not guarantees of future performance and accordingly investors are cautioned not to put undue reliance on forward-looking statements due to the inherent uncertainty therein.
 

 
2

 

PART I
 
Item 1.                 Identity of Directors, Senior Management and Advisors
 
Not applicable.
 
Item 2.                 Offer Statistics and Expected Timetable
 
Not applicable.
 
Item 3.                 Key Information
 
A.           Selected Financial Data
 
The following tables present our selected consolidated financial data.  You should read these tables in conjunction with our audited consolidated financial statements and accompanying notes included in Item 18 of this Annual Report and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 5 of this Annual Report.
 
The financial data as at May 31, 2010, 2009, 2008, 2007 and 2006 and for the years ended May 31, 2010, 2009, 2008, 2007 and 2006 have been derived from, and are qualified in their entirety by reference to, our audited consolidated financial statements, which have been prepared in accordance with Canadian GAAP and reconciled to U.S. GAAP in the Supplementary Information included with the Financial Statements included in this Annual Report.
 
The following table presents a summary of our consolidated statement of operations derived from our audited financial statements for the years ended May 31, 2010, 2009, 2008, 2007 and 2006.
 
Consolidated statements of operations data
 
(In thousands, except per share data)
 
   
Years Ended May 31,
 
   
20101 2
   
20091 2
   
20081 2
   
20071 2
   
20061 2
 
In accordance with Canadian GAAP
                             
Revenue
  $ 131     $ 184     $ 43     $ 107     $ 26  
Research and development (a)
  $ 2,517     $ 3,757     $ 6,620     $ 3,505     $ 10,237  
General and administrative (a)
  $ 2,964     $ 2,958     $ 3,715     $ 3,727     $ 4,334  
Net earnings (loss)
  $ 5,331     $ (8,860 )   $ (6,334 )   $ (9,638 )   $ (17,909 )
Basic and diluted earnings (loss) per share
  $ 0.57     $ (1.08 )   $ (0.87 )   $ (1.41 )   $ (3.10 )
Weighted average number of common shares outstanding
    9,364       8,236       7,169       6,829       5,784  
                                         
In accordance with U.S. GAAP2
                                       
Net earnings (loss)
  $ 5,705     $ (7,735 )   $ (5,526 )   $ (9,150 )   $ (16,388 )
Basic and diluted loss per share
  $ 0.61     $ (0.94 )   $ (0.77 )   $ (1.41 )   $ (2.83 )
 
(a)
 Amounts in 2008 and 2007 have been reclassified to conform to the financial statement presentation adopted in 2009.

 
3

 


 
The following table presents a summary of our consolidated balance sheet as at May 31, 2010, 2009, 2008, 2007 and 2006.
 
Consolidated balance sheet data
 
(In Thousands)
 
As at May 31,
 
   
2010 2
   
2009 2
   
20081 2
   
20071 2
   
20061 2
 
In accordance with Canadian GAAP
                             
Cash and cash equivalents
  $ 667     $ 5,374     $ 2,652     $ 1,405     $ 2,692  
Marketable securities and other investments
  $ 247     $ 490     $ 6,784     $ 10,993     $ 5,627  
Total assets
  $ 2,303     $ 7,527     $ 11,607     $ 15,475     $ 11,461  
Total debt
  $ 2,845     $ 15,878     $ 15,459     $ 14,714     $ 14,017  
Total shareholders’ deficit
  $ (542 )   $ (8,351 )   $ (3,852 )   $ 761     $ (2,556 )
Number of common shares outstanding
    9,933       8,560       7,255       7,075       5,823  
Dividends paid on common shares
    -       -       -       -       -  
                                         
In accordance with U.S. GAAP2
                                       
Total assets
  $ 2,303     $ 7,592     $ 11,911     $ 15,579     $ 11,625  
Total debt
  $ 2,845     $ 16,322     $ 17,314     $ 17,232     $ 17,277  
Total shareholders’ deficit
  $ (542 )   $ (8,729 )   $ (5,403 )   $ (1,653 )   $ (5,652 )

Footnotes:
 
(1)
On July 10, 2007 , the Company completed a plan of arrangement and corporate reorganization with Old Lorus, 6707157 Canada Inc. and Pinnacle International Lands Inc.  As a result of the plan of arrangement and reorganization, among other things, each common share of Old Lorus was exchanged for one common share of the Company and the assets (excluding certain future tax assets and related valuation allowance) and liabilities of Old Lorus were transferred to the Company and/or its subsidiaries.  The Company continued the business of Old Lorus after the Arrangement Date with the same officers and employees and continued to be governed by the same Board of Directors as Old Lorus prior to the Arrangement Date.  Therefore, the Company’s operations have been accounted for on a continuity of interest basis and accordingly, the consolidated financial statement information above reflect that of the Company as if it had always carried on the business formerly carried on by Old Lorus.
 
 
(2)
At our annual and special meeting of shareholders held on November 30, 2009, our shareholders approved a special resolution permitting our board of directors, in its sole discretion, to file an amendment to our articles of incorporation to consolidate our issued and outstanding common shares. On May 12, 2010, our board approved the share consolidation on the basis of one post-consolidation common share for every 30 pre-consolidation common shares. The record date and effective date for the share consolidation was May 25, 2010. Our common shares began trading on the TSX on a post consolidation basis on May 31, 2010, and were quoted on the OTCBB on a post-consolidation basis beginning on June 1, 2010. The share consolidation resulted in an adjustment to the exercise price and number of common shares issuable upon exercise of outstanding stock options and warrants. In this annual report, all references to number of shares, stock options and warrants in the current and past periods have been adjusted to reflect the impact of the consolidation unless noted otherwise.
 

 
4

 


 
Changes in accounting polices:
 
(a)           Goodwill and intangible assets:
Effective June 1, 2009, the Company adopted The Canadian Institute of Chartered Accountants’ Handbook Section 3064, Goodwill and Intangible Assets, which replaced Handbook Section 3062, Goodwill and Other Intangible Assets, and Section 3450, Research and Development Costs and establishes the standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The adoption of this new standard did not have an impact on the Company’s consolidated financial statements.
 
(b)           Financial instruments:
Effective June 1, 2009, the Company adopted the amendments under Handbook Section 3862, Financial Instruments - Disclosures, to include additional disclosure requirements about fair value measurement for financial instruments and liquidity risk disclosures. These amendments require a three level hierarchy that reflects the significance of the inputs used in making the fair value measurements. Fair value of assets and liabilities included in Level 1 are determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabilities in Level 2 include valuations using inputs other than the quoted prices for which all significant inputs are based on observable market data, either directly or indirectly. Level 3 valuations are based on inputs that are not based on observable market data. The adoption of the new standard did not have a material impact on the consolidated financial statements.
 
(c)           Credit risk and fair value of financial assets and financial liabilities:
Effective January 1, 2009, the Company adopted Emerging Issue Committee Abstract 173, Credit Risk and the Fair Value of Financial Assets and Financial Liabilities. Emerging Issue Committee Abstract 173 requires the Company to take into account the Company’s own credit risk and the credit risk of the counterparty in determining the fair value of financial assets and financial liabilities, including derivative instruments. The adoption of the new standard did not have a material impact on the consolidated financial statements.
 
(2)
The significant differences between the line items under Canadian GAAP and those as determined under U.S. GAAP arise primarily from:
 
Fiscal 2006 to 2010
 
The following table reconciles the loss per Canadian GAAP to loss per U.S. GAAP for years ended May 31, 2006, 2007, 2008, 2009 and 2010:
 
(In Thousands, except per common share data)
 
Years ended May 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
Net Earnings (loss) per Canadian GAAP
  $ 5,331     $ (8,860 )   $ (6,334 )   $ (9,638 )   $ (17,909 )
                                         
Gain on repurchase of convertible debentures and transfer of assets (i)
    328       -       -       -       -  
Accretion of convertible debentures (i)
    54       1,222       903       741       480  
Amortization and write off of debt issue costs (i)
    (4 )     (48 )     (40 )     (59 )     (108 )
Stock compensation expense (ii)
    4       (39 )     (47 )     (194 )     1,149  
Short-term investments (iii)
    (8 )     (10 )     (7 )     -       -  
Earnings (Loss) per U.S. GAAP
    5,705       (7,735 )     (5,526 )     (9,150 )     (16,388 )
Other comprehensive loss (iii)
    8       10       (20 )     -       -  
Earnings (loss) and comprehensive loss per U.S. GAAP
    5,713       (7,725 )     (5,546 )     (9,150 )     (16,388 )
                                         
Basic and diluted earnings (loss) per common share per U.S. GAAP
  $ 0.61     $ (0.94 )   $ (0.77 )   $ (1.41 )   $ (2.83 )


 
5

 

Under U.S. GAAP, the number of weighted average common shares outstanding for basic and diluted loss per share is the same as under Canadian GAAP.
 
 (i) Convertible debentures
On June 22, 2009, the Company reached a settlement with the debenture holders with respect to the purchase and settlement of the convertible debentures.   Under the agreement, Lorus purchased all of the convertible debentures from The Erin Mills Investment Corporation for consideration that included a cash payment of $3.3 million, the assignment of the rights under the license agreement with ZOR Pharmaceuticals Inc, LLC (“ZOR”), certain intellectual property associated with Virulizin and all of Lorus' shares in its wholly owned subsidiary, Pharma Immune, which held an equity interest in ZOR.  As a result of the transaction, the Company recognized a gain on the repurchase of the debentures of $11.0 million reflecting the difference between the fair value of the debentures at the repurchase date, net of transaction costs of approximately $221 thousand, and the cash payment amount of $3.3 million. The gain on repurchase of the debentures did not result in income taxes payable as the Company has sufficient capital loss and non-capital loss carryforwards to shelter these gains.  As the carrying value of the convertible debenture was different under U.S, GAAP, as explained below, the Company recognized an additional gain of $328 thousand on the repurchase of the convertible debentures and transfer of assets including the write-down of the deferred financing charges compared to under Canadian GAAP in the year ended May 31, 2010.
 
Under Canadian GAAP, the conversion option embedded in the convertible debentures is presented separately as a component of shareholders’ equity. Under U.S. GAAP, the embedded conversion option is not subject to bifurcation and is thus presented as a liability along with the balance of the convertible debentures. Measurement differences from the accretion  of the value attributed to the conversion option on the convertible debentures and amortization of debt issue costs are further explained in the  supplementary information entitled “Reconciliation of Canadian and United States Generally Accepted Accounting Principles”.
 
(ii) Stock options
For fiscal 2006, the Company followed the fair value based method of recording stock compensation expense under Canadian GAAP, and an intrinsic value method of recording stock compensation expense under U.S. GAAP.  This is further explained in the supplementary information entitled “Reconciliation of Canadian and United States Generally Accepted Accounting Principles”.
 
Effective June 1, 2006 the Company adopted the fair value-based method of accounting for stock options granted to employees and directors as required by FASB Statement No. 123R in accordance with the modified prospective method.  Accordingly the company has applied the fair value-based method to all employee stock options granted after June 1, 2006.  Additionally, compensation costs for awards granted in prior periods for which the requisite service period has not been rendered as of June 1, 2006 will be recognized in the consolidated statement of operations and deficit as the requisite service is rendered.
 
During fiscal 2007, the Company recorded stock compensation expense of $503 thousand (2006 - $1.2 million) in accordance with Canadian GAAP in the consolidated statement of operations, representing the amortization applicable to the current year at the estimated fair value of options granted since June 1, 2002, and an offsetting adjustment to stock options of $503 thousand in the consolidated balance sheets. Under U.S. GAAP, the Company recognized $697 thousand in expense during the same period as a result of adopting SFAS 123R.
 
The primary reason for the difference between US GAAP and Canadian GAAP relating to fiscal years 2008, 2009 and 2010 is due to estimation of forfeitures in the determination of the stock-based compensation expense under US GAAP and accounting for forfeitures as they occur under Canadian GAAP.
 
(iii) Financial instruments
Effective June 1, 2007, the Company adopted the recommendations of The Canadian Institute of Chartered Accountants’ Handbook Section 3855, Financial Instruments - Recognition and Measurement, retroactively without restatement of prior periods. This section provides standards for recognition, measurement, disclosure and presentation of financial assets, financial liabilities and non-financial derivatives.
 
As part of the adoption of the new standards on June 1, 2007, the Company designated certain short term investments consisting of corporate instruments as “held-for-trading”.  This change in accounting policy for Canadian GAAP resulted in a decrease in the carrying amount of these investments amounting to $27 thousand and an increase in the fiscal 2008 opening deficit accumulated during the development stage of $27 thousand.  Further, the Company recognized a net unrealized gain in the consolidated statements of operations for the year ended May 31, 2010 of $8 thousand (2009 - $10 thousand, 2008 - $7 thousand).
 

 
6

 

Under U.S. GAAP, the Company previously accounted for these investments as “held-to-maturity” in accordance with SFAS 115, now Accounting Standards (ASC) 320, Investments in Debt and Equity Securities. Because the Company did not have the ability or intent to hold these investments until their stated maturity date, the Company made a reassessment of the appropriateness of the previous classification and reallocated these investments as “available-for-sale” as of May 31, 2008, in accordance with SFAS 115. Consequently, an unrealized holding gain in the amount of $8 thousand for the year ended May 31, 2010 (2009 - $10 thousand gain, 2008 - loss of $20 thousand) was recorded in other comprehensive income.
 
We publish our consolidated financial statements in Canadian (“CDN”) dollars.  In this Annual report, except where otherwise indicated, all amounts are stated in CDN dollars.
 
The following table sets out the exchange rates of CDN$ for 1 US$ for the following periods as taken from the Bank of Canada website:
 
Period
Average Close
High
Low
October, 2010
1.0184
1.0319
1.0048
September, 2010
1.0336
1.0535
1.0256
August, 2010
1.0412
1.0665
1.0166
July, 2010
1.0429
1.0650
1.0283
June, 2010
1.0396
1.0646
1.0212
May, 2010
1.0391 
1.0700
1.0106
       
Fiscal Year Ended May 31, 2010
1.0635
1.1676
0.9988
Fiscal Year Ended May 31, 2009
1.1567
1.2991
1.0012
Fiscal Year Ended May 31, 2008
1.0140
1.0750
0.9170
Fiscal Year Ended May 31, 2007
1.1366
1.1855
1.0696
Fiscal Year Ended May 31, 2006
1.1701
1.2460
1.0948

B.           Capitalization and Indebtedness
 
Not applicable.
 
C.           Reasons for the Offer and Use of Proceeds
 
Not applicable.
 
D.           Risk Factors
 
Before making an investment decision with respect to our common shares, you should carefully consider the following risk factors, in addition to the other information included or incorporated by reference in this Annual Report.  Additional risks not currently known by us or that we consider immaterial at the present time may also impair our business, financial condition, prospects or results of operations.  If any of the following risks occur, our business, financial condition, prospects or results of operations would likely be affected.  In that case, the trading price of our common shares could decline and you may lose all or part of the money you paid to buy our common shares.  The risks set out below are not the only we currently face; other risks may arise in the future.
 
RISKS RELATED TO OUR BUSINESS
 
We might not be able to continue as a going concern.
 

 
7

 

Management has forecasted that the Company’s current level of cash and cash equivalents and short-term investments will not be sufficient to execute its current planned expenditures for the next twelve months without further investment.
 
Mr. Abramson, a member of our Board of Directors, advanced three tranches of $500 thousand to the Company on each of August 11, September 13, and October 5, 2010 by way of six month 10% interest promissory notes.  On August 27, 2009 the company obtained a standby purchase commitment of $4.0 million from Mr. Abramson in connection with a rights offering to its existing shareholders.  The rights offering closed on November 9, 2010 with the Company raising total proceeds of $4.6 million before expenditures.  A total of 4.2 million units (each unit consisting of one common share and one common share purchase warrant exercisable at a price of $1.33 for 18 months) of the Company at a price of $1.11 per unit were issued in connection with the rights offering with 3.6 million being issued to Mr. Abramson in satisfaction of the $4.0 million standby purchase commitment.  From the proceeds the Company repaid the $1.5 million in outstanding promissory notes to Mr. Abramson.
 
Management believes that with the additional funds received in November 2010, it has sufficient funding to continue to execute its planned expenditures without interruption for the next six months without spending reductions.  The Company maintains a very low overhead burden which allows spending to be reduced or increased as the market allows, should the Corporation be unable to secure the additional funding to continue its planned operations over the next few months, the Corporation will implement a reduced spending strategy that may involve reduction of personnel and reduction of spending on earlier stage research programs.  The Corporation believes that this strategy will enable it to maintain its key research programs for the next 12 months.  The Company continues to pursue additional funding and partnership opportunities to execute its planned expenditures in the future.  However, there can be no assurance that the capital will be available as necessary to meet these continuing expenditures, or if the capital is available, that it will be on terms acceptable to the Company.  The issuance of common shares by the Company could result in significant dilution in the equity interest of existing shareholders.  There can be no assurance that the Company will be able to obtain sufficient financing to meet future operational needs.  As a result, there is a significant doubt as to whether the Company will be able to continue as a going concern and realize its assets and pay its liabilities as they fall due.
 
We need to raise additional capital.
 
We need to raise additional capital. To obtain the necessary capital, we must rely on some or all of the following: grants and tax credits, additional share issues and collaboration agreements or corporate partnerships to provide full or partial funding for our activities. We cannot assure you that additional funding will be available on terms that are acceptable to us or in amounts that will enable us to carry out our business plan.

If we cannot obtain the necessary capital on acceptable terms, we will have to:
 
 
Ÿ
engage in equity financings that would result in significant dilution to existing investors;
 
 
Ÿ
delay or reduce the scope of or eliminate one or more of our development programs;
 
 
Ÿ
obtain funds through arrangements with collaborators or others that may require us to relinquish rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves; or license rights to technologies, product candidates or products on terms that are less favourable to us than might otherwise be available;
 
 
Ÿ
considerably reduce operations; or
 
 
Ÿ
cease our operations.
 
We have a history of operating losses. We expect to incur net losses and we may never achieve or maintain profitability.
 
We have not been profitable since our inception in 1986. Under Canadian GAAP, we reported net (earnings) losses of ($5.3 million), $8.9 million and $6.3 million for the years ended May 31, 2010, 2009 and 2008, respectively and as of May 31, 2010, we had an accumulated deficit of $184.1 million.
 

 
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To date we have only generated nominal revenues from the sale of Virulizin™ in Mexico and revenues associated with the license agreement with ZOR Pharmaceuticals, LLC.  We stopped selling Virulizin™ in Mexico in July 2005 and assigned the rights under the license agreement with ZOR Pharmaceuticals, LLC to The Erin Mills Investment Corporation as part of the consideration for our repurchase of secured convertible debentures in June 2009.  We have not generated any other revenue from product sales to date and it is possible that we will never have sufficient product sales revenue to achieve profitability. We expect to continue to incur losses for at least the next several years as we or our collaborators and licensees pursue clinical trials and research and development efforts. To become profitable, we, either alone or with our collaborators and licensees, must successfully develop, manufacture and market our current product candidate, LOR-2040, as well as continue to identify, develop, manufacture and market new product candidates. It is possible that we will never have significant product sales revenue or receive significant royalties on our licensed product candidates. If funding is insufficient at any time in the future, we may not be able to develop or commercialize our products, take advantage of business opportunities or respond to competitive pressures.
 
We are an early stage development company.
 
We are at an early stage of development. Significant additional investment will be necessary to complete the development of any of our products. Pre-clinical and clinical trial work must be completed before our products could be ready for use within the market that we have identified. We may fail to develop any products, to obtain regulatory approvals, to enter clinical trials or to commercialize any products. We do not know whether any of our potential product development efforts will prove to be effective, meet applicable regulatory standards, obtain the requisite regulatory approvals, be capable of being manufactured at a reasonable cost or be accepted in the marketplace.

The product candidates we are currently developing are not expected to be commercially viable for several years and we may encounter unforeseen difficulties or delays in commercializing our product candidates. In addition, our products may cause undesirable side effects.

Our product candidates require significant funding to reach regulatory approval assuming positive clinical results.  Such funding will be very difficult, or impossible to raise in the public markets.  If such partnerships are not attainable, the development of these product candidates maybe significantly delayed or stopped altogether.  The announcement of such delay or discontinuation of development may have a negative impact on our share price.
 
We have indemnified our predecessor, Old Lorus, and its directors, officers and employees in respect of the Arrangement.
 
In connection with the reorganization that we undertook in fiscal 2008, we have agreed to indemnify Old Lorus and its directors, officers and employees from and against all damages, losses, expenses (including fines and penalties), other third party costs and legal expenses, to which any of them may be subject arising out of any matter occurring:

 
(i)
prior to, at or after the effective time of the Arrangement and directly or indirectly relating to any of the assets of Old Lorus transferred to New Lorus pursuant to the Arrangement (including losses for income, sales, excise and other taxes arising in connection with the transfer of any such asset) or conduct of the business prior to the effective time of the Arrangement;
 
 
(ii)
prior to, at or after the effective time of the Arrangement as a result of any and all interests, rights, liabilities and other matters relating to the assets transferred by Old Lorus to New Lorus pursuant to the Arrangement; and
 
 
(iii)
prior to or at the effective time of the Arrangement and directly or indirectly relating to, with certain exceptions, any of the activities of Old Lorus or the Arrangement.
 
This indemnification could result in significant liability to us.

 
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We may be unable to obtain partnerships for one or more of our product candidates which could curtail future development and negatively affect our share price.  In addition, our partners might not satisfy their contractual responsibilities or devote sufficient resources to our partnership.
 
Our strategy for the research, development and commercialization of our products requires entering into various arrangements with corporate collaborators, licensers, licensees and others, and our commercial success is dependent upon these outside parties performing their respective contractual responsibilities. The amount and timing of resources that such third parties will devote to these activities may not be within our control. We cannot assure you that such parties will perform their obligations as expected. We also cannot assure you that our collaborators will devote adequate resources to our programs. In addition, we could become involved in disputes with our collaborators, which could result in a delay or termination of the related development programs or result in litigation. We intend to seek additional collaborative arrangements to develop and commercialize some of our products. We may not be able to negotiate collaborative arrangements on favourable terms, or at all, in the future, or that our current or future collaborative arrangements will be successful.
 
If we cannot negotiate collaboration, licence or partnering agreements, we may never achieve profitability.
 
Clinical trials are long, expensive and uncertain processes and Health Canada or the FDA may ultimately not approve any of our product candidates. We may never develop any commercial drugs or other products that generate revenues.
 
None of our product candidates has received regulatory approval for commercial use and sale in North America. We cannot market a pharmaceutical product in any jurisdiction until it has completed thorough preclinical testing and clinical trials in addition to that jurisdiction’s extensive regulatory approval process. In general, significant research and development and clinical studies are required to demonstrate the safety and effectiveness of our product candidates before we can submit any regulatory applications.
 
Clinical trials are long, expensive and uncertain processes. Clinical trials may not be commenced or completed on schedule, and Health Canada or the FDA or any other regulatory body may not ultimately approve our product candidates for commercial sale.
 
The clinical trials of any of our drug candidates could be unsuccessful, which would prevent us from advancing, commercializing or partnering the drug.
 
Even if the results of our preclinical studies or clinical trials are initially positive, it is possible that we will obtain different results in the later stages of drug development or that results seen in clinical trials will not continue with longer term treatment. Positive results in early Phase I or Phase II clinical trials may not be repeated in larger Phase II or Phase III clinical trials.  For example, results of our Phase III clinical trial of Virulizin™ did not meet the primary endpoint of the study despite promising preclinical and early stage clinical data.  All of our potential drug candidates are prone to the risks of failure inherent in drug development.
 
Preparing, submitting and advancing applications for regulatory approval is complex, expensive and time intensive and entails significant uncertainty. A commitment of substantial resources to conduct time-consuming research, preclinical studies and clinical trials will be required if we are to complete development of our products.
 
Clinical trials of our products require that we identify and enrol a large number of patients with the illness under investigation. We may not be able to enrol a sufficient number of appropriate patients to complete our clinical trials in a timely manner particularly in smaller indications such as acute myeloid leukemia.  If we experience difficulty in enrolling a sufficient number of patients to conduct our clinical trials, we may need to delay or terminate ongoing clinical trials and will not accomplish objectives material to our success that could affect the price of our common shares. Delays in planned patient enrolment or lower than anticipated event rates in our current clinical trials or future clinical trials may result in increased costs, program delays, or both.
 
In addition, unacceptable toxicities or adverse side effects may occur at any time in the course of preclinical studies or human clinical trials or, if any product candidates are successfully developed and approved for marketing, during commercial use of any approved products. The appearance of any such unacceptable toxicities or adverse side effects could interrupt, limit, delay or abort the development of any of our product candidates or, if previously approved, necessitate their withdrawal from the market. Furthermore, disease resistance or other unforeseen factors may limit the effectiveness of our potential products.
 

 
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Our failure to develop safe, commercially viable drugs would substantially impair our ability to generate revenues and sustain our operations and would materially harm our business and adversely affect our share price. We may never achieve profitability.
 
As a result of intense competition and technological change in the pharmaceutical industry, the marketplace may not accept our products or product candidates, and we may not be able to compete successfully against other companies in our industry and achieve profitability.
 
Many of our competitors have:
 
 
Ÿ
drug products that have already been approved or are in development, and operate large, well-funded research and development programs in these fields;
 
 
Ÿ
substantially greater financial and management resources, stronger intellectual property positions and greater manufacturing, marketing and sales capabilities, areas in which we have limited or no experience; and
 
 
Ÿ
significantly greater experience than we do in undertaking preclinical testing and clinical trials of new or improved pharmaceutical products and obtaining required regulatory approvals;
 
Consequently, our competitors may obtain Health Canada, FDA and other regulatory approvals for product candidates sooner and may be more successful in manufacturing and marketing their products than we or our collaborators are.
 
Our competitor’s existing and future products, therapies and technological approaches will compete directly with the products we seek to develop. Current and prospective competing products may provide greater therapeutic benefits for a specific problem or may offer easier delivery or comparable performance at a lower cost;
 
Any product candidate that we develop and that obtains regulatory approval must then compete for market acceptance and market share. Our product candidates may not gain market acceptance among physicians, patients, healthcare payers and the medical community. Further, any products we develop may become obsolete before we recover any expenses we incurred in connection with the development of these products.
 
As a result, we may never achieve profitability.
 
If we fail to attract and retain key employees, the development and commercialization of our products may be adversely affected.
 
We depend heavily on the principal members of our scientific and management staff. If we lose any of these persons, our ability to develop products and become profitable could suffer. The risk of being unable to retain key personnel may be increased by the fact that we have not executed long-term employment contracts with our employees, except for our senior executives. Our future success will also depend in large part on our ability to attract and retain other highly qualified scientific and management personnel. We face competition for personnel from other companies, academic institutions, government entities and other organizations.
 
We may be unable to obtain patents to protect our technologies from other companies with competitive products, and patents of other companies could prevent us from manufacturing, developing or marketing our products.
 
Patent protection:
The patent positions of pharmaceutical and biotechnology companies are uncertain and involve complex legal and factual questions. The United States Patent and Trademark Office and many other patent offices in the world have not established a consistent policy regarding the breadth of claims that they will allow in biotechnology patents.
 

 
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Allowable patentable subject matter and the scope of patent protection obtainable may differ between jurisdictions.  If a patent office allows broad claims, the number and cost of patent interference proceedings in the U.S. or analogous proceedings in other jurisdictions and the risk of infringement litigation may increase. If it allows narrow claims, the risk of infringement may decrease, but the value of our rights under our patents, licenses and patent applications may also decrease.
 
The scope of the claims in a patent application can be significantly modified during prosecution before the patent is issued. Consequently, we cannot know whether our pending applications will result in the issuance of patents or, if any patents are issued, whether they will provide us with significant proprietary protection or will be circumvented, invalidated or found to be unenforceable.
 
Until recently, patent applications in the U.S. were maintained in secrecy until the patents issued, and publication of discoveries in scientific or patent literature often lags behind actual discoveries. Patent applications filed in the United States after November 2000 generally will be published 18 months after the filing date unless the applicant certifies that the invention will not be the subject of a foreign patent application.  In many other jurisdictions, such as Canada, patent applications are published 18 months from the priority date.  We cannot assure you that, even if published, we will be aware of all such literature. Accordingly, we cannot be certain that the named inventors of our products and processes were the first to invent that product or process or that we were the first to pursue patent coverage for our inventions.
 
Enforcement of intellectual property rights:
Protection of the rights revealed in published patent applications can be complex, costly and uncertain.  Our commercial success depends in part on our ability to maintain and enforce our proprietary rights. If third parties engage in activities that infringe our proprietary rights, our management’s focus will be diverted and we may incur significant costs in asserting our rights. We may not be successful in asserting our proprietary rights, which could result in our patents being held invalid or a court holding that the third party is not infringing, either of which would harm our competitive position.
 
Others may design around our patented technology. We may have to participate in interference proceedings declared by the United States Patent and Trademark Office, European opposition proceedings, or other analogous proceedings in other parts of the world to determine priority of invention and the validity of patent rights granted or applied for, which could result in substantial cost and delay, even if the eventual outcome is favourable to us. We cannot assure you that our pending patent applications, if issued, would be held valid or enforceable.
 
Trademark protection:
In order to protect goodwill associated with our company and product names, we rely on trademark protection for our marks. For example, we have an application to register the Virulizin™ trademark with the United States Patent and Trademark Office. A third party may assert a claim that the Virulizin™ mark is confusingly similar to its mark and such claims or the failure to timely register the Virulizin™ mark or objections by the FDA could force us to select a new name for Virulizin™, which could cause us to incur additional expense.
 
Trade secrets:
We also rely on trade secrets, know-how and confidentiality provisions in our agreements with our collaborators, employees and consultants to protect our intellectual property. However, these and other parties may not comply with the terms of their agreements with us, and we might be unable to adequately enforce our rights against these people or obtain adequate compensation for the damages caused by their unauthorized disclosure or use of our trade secrets or know how. Our trade secrets or those of our collaborators may become known or may be independently discovered by others.
 
Our products and product candidates may infringe the intellectual property rights of others, which could increase our costs.
 
Our success also depends on avoiding infringement of the proprietary technologies of others. In particular, there may be certain issued patents and patent applications claiming subject matter which we or our collaborators may be required to license in order to research, develop or commercialize at least some of our product candidates, including LOR-2040 and small molecules. In addition, third-parties may assert infringement or other intellectual property claims against us based on our patents or other intellectual property rights. An adverse outcome in these proceedings could subject us to significant liabilities to third-parties, require disputed rights to be licensed from third-parties or require us to cease or modify our use of the technology. If we are required to license such technology, we cannot assure you that a license under such patents and patent applications will be available on acceptable terms or at all. Further, we may incur substantial costs defending ourselves in lawsuits against charges of patent infringement or other unlawful use of another’s proprietary technology.
 

 
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If product liability claims are brought against us or we are unable to obtain or maintain product liability insurance, we may incur substantial liabilities that could reduce our financial resources.
 
The clinical testing and commercial use of pharmaceutical products involves significant exposure to product liability claims. We have obtained limited product liability insurance coverage for our clinical trials on humans; however, our insurance coverage may be insufficient to protect us against all product liability damages. Further, liability insurance coverage is becoming increasingly expensive and we might not be able to obtain or maintain product liability insurance in the future on acceptable terms or in sufficient amounts to protect us against product liability damages. Regardless of merit or eventual outcome, liability claims may result in decreased demand for a future product, injury to reputation, withdrawal of clinical trial volunteers, loss of revenue, costs of litigation, distraction of management and substantial monetary awards to plaintiffs. Additionally, if we are required to pay a product liability claim, we may not have sufficient financial resources to complete development or commercialization of any of our product candidates and our business and results of operations will be adversely affected.
 
We have no manufacturing capabilities. We depend on third-parties, including a number of sole suppliers, for manufacturing and storage of our product candidates used in our clinical trials. Product introductions may be delayed or suspended if the manufacture of our products is interrupted or discontinued.
 
Other than limited quantities for research purposes, we do not have manufacturing facilities to produce supplies of LOR-2040, small molecule or any of our other product candidates to support clinical trials or commercial launch of these products, if they are approved. We are dependent on third parties for manufacturing and storage of our product candidates. If we are unable to contract for a sufficient supply of our product candidates on acceptable terms, or if we encounter delays or difficulties in the manufacturing process or our relationships with our manufacturers, we may not have sufficient product to conduct or complete our clinical trials or support preparations for the commercial launch of our product candidates, if approved.
 
Our operations involve hazardous materials and we must comply with environmental laws and regulations, which can be expensive and restrict how we do business.
 
Our research and development activities involve the controlled use of hazardous materials, radioactive compounds and other potentially dangerous chemicals and biological agents. Although we believe our safety procedures for these materials comply with governmental standards, we cannot entirely eliminate the risk of accidental contamination or injury from these materials. We currently have insurance, in amounts and on terms typical for companies in businesses that are similarly situated  that could cover all or a portion of a damage claim arising from our use of hazardous and other materials. However, if an accident or environmental discharge occurs, and we are held liable for any resulting damages, the associated liability could exceed our insurance coverage and our financial resources.
 
Our interest income is subject to fluctuations of interest rates in our investment portfolio.
 
Our investments are held to maturity and have staggered maturities to minimize interest rate risk. We cannot assure you that interest income fluctuations will not have an adverse impact on our financial condition. We maintain all our accounts in Canadian dollars, but a portion of our expenditures are in foreign currencies. We do not currently engage in hedging our foreign currency requirements to reduce exchange rate risk.
 

 
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RISKS RELATED TO OUR COMMON SHARES
 
Our share price has been and may continue to be volatile and an investment in our common shares could suffer a decline in value.
 
You should consider an investment in our common shares as risky and invest only if you can withstand a significant loss and wide fluctuations in the market value of your investment. We receive only limited attention by securities analysts and frequently experience an imbalance between supply and demand for our common shares. The market price of our common shares has been highly volatile and is likely to continue to be volatile. Factors affecting our common share price include but are not limited to:
 
 
Ÿ
our financial position and doubt as to whether we will be able to continue as a going concern;
 
 
Ÿ
our ability to raise additional capital;
 
 
Ÿ
the progress of our and our collaborators’ clinical trials, including our and our collaborators’ ability to produce clinical supplies of our product candidates on a timely basis and in sufficient quantities to meet our clinical trial requirements;
 
 
Ÿ
announcements of technological innovations or new product candidates by us, our collaborators or our competitors;
 
 
Ÿ
fluctuations in our operating results;
 
 
Ÿ
published reports by securities analysts;
 
 
Ÿ
developments in patent or other intellectual property rights;
 
 
Ÿ
publicity concerning discovery and development activities by our licensees;
 
 
Ÿ
the cash and short term investments held us and our ability to secure future financing;
 
 
Ÿ
public concern as to the safety and efficacy of drugs that we and our competitors develop;
 
 
Ÿ
governmental regulation and changes in medical and pharmaceutical product reimbursement policies; and
 
 
Ÿ
general market conditions.
 
Future sales of our common shares by us or by our existing shareholders could cause our share price to fall.
 
The issuance of common shares by us could result in significant dilution in the equity interest of existing shareholders and adversely affect the market price of our common shares. Sales by existing shareholders of a large number of our common shares in the public market and the issuance of shares issued in connection with strategic alliances, or the perception that such additional sales could occur, could cause the market price of our common shares to decline.
 
There is a limited market for our common shares in the United States.
 
Our common shares are quoted on the Over-the-Counter Bulletin Board market (“OTCBB”). There is no assurance that an active trading market will develop on the OTCBB. If a shareholder in the United States is unable to sell their common shares in the United States, they will be forced to sell their common shares over the Toronto Stock Exchange (“TSX”), which may expose the selling shareholder to currency exchange risk. In addition, because we are not listed on any United States stock exchange, resales of our common shares to United States persons under state securities or “blue sky” laws are likely to be limited to unsolicited transactions.
 

 
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Our share price is volatile.
 
The market price of our common shares, like that of the securities of many other biotechnology companies in the development stage, has been, and is likely to continue to be, highly volatile. This increases the risk of securities litigation related to such volatility. Factors such as the results of our preclinical studies and clinical trials, as well as those of our collaborators or our competitors; other evidence of the safety or effectiveness of our products or those of our competitors; announcements of technological innovations or new products by us or our competitors; governmental regulatory actions; developments with our collaborators; developments (including litigation) concerning patent or other proprietary rights of our company or our competitors; concern as to the safety of our products; period-to-period fluctuations in operating results; changes in estimates of our performance by securities analysts; market conditions for biotechnology stocks in general; and other factors not within the control of our company could have a significant adverse effect on the market price of our common shares.
 
Our outstanding common shares could be subject to dilution.
 
The exercise of stock options and warrants already issued by us, and the issuance of other additional securities in the future, could result in dilution in the value of our common shares and the voting power represented by the common shares. Furthermore, to the extent holders of our stock options or other securities exercise their securities and then sell the common shares they receive, our share price may decrease due to the additional amount of our common shares available in the market.
 
It may be difficult for non-Canadian investors to obtain and enforce judgments against us because of our Canadian incorporation and presence.
 
We are a corporation existing under the laws of Canada. Most of our directors and officers, and all of the experts named in this prospectus and the documents incorporated by reference into this prospectus, are residents of Canada, and all or a substantial portion of their assets, and a substantial portion of our assets, are located outside the United States. Consequently, although we have appointed an agent for service of process in the United States, it may be difficult for holders of these securities who reside in the United States to effect service within the United States upon those directors and officers, and the experts who are not residents of the United States. It may also be difficult for holders of these securities who reside in the United States to realize in the United States upon judgments of courts of the United States predicated upon our civil liability and the civil liability of our directors, officers and experts under the United States federal securities laws. Investors should not assume that Canadian courts (i) would enforce judgments of United States courts obtained in actions against us or such directors, officers or experts predicated upon the civil liability provisions of the United States federal securities laws or the securities or “blue sky” laws of any state within the United States or (ii) would enforce, in original actions, liabilities against us or such directors, officers or experts predicated upon the United States federal securities laws or any such state securities or “blue sky” laws. In addition, we have been advised by our Canadian counsel that in normal circumstances, only civil judgments and not other rights arising from United States securities legislation are enforceable in Canada and that the protections afforded by Canadian securities laws may not be available to investors in the United States.
 
We are likely a “passive foreign investment company” which will likely have adverse U.S. federal income tax consequences for U.S. shareholders.
 
U.S. investors in our common shares should be aware that the Company believes it was classified as a passive foreign investment company (“PFIC”) during the tax year ended May 31, 2010, and based on current business plans and financial expectations, the Company believes that it will be a PFIC for the current tax year.  If the Company is a PFIC for any year during a U.S. shareholder’s holding period, then such U.S. shareholder generally will be required to treat any gain realized upon a disposition of common shares, or any so-called “excess distribution” received on its common shares, as ordinary income, and to pay an interest charge on a portion of such gain or distributions, unless the shareholder makes a timely and effective “qualified electing fund” election (“QEF Election”) or a “mark-to-market” election with respect to the common shares.  A U.S. shareholder who makes a QEF Election generally must report on a current basis its share of the Company’s net capital gain and ordinary earnings for any year in which the Company is a PFIC, whether or not the Company distributes any amounts to its shareholders.  However, U.S. shareholders should be aware that there can be no assurance that we will satisfy record keeping requirements that apply to a qualified electing fund, or that we will supply U.S. shareholders with information that such U.S. shareholders require to report under the QEF Election rules, in the event that we are a PFIC and a U.S. shareholder wishes to make a QEF Election.  Thus, U.S. shareholders may not be able to make a QEF Election with respect to their common shares.  A U.S. shareholder who makes the mark-to-market election generally must include as ordinary income each year the excess of the fair market value of the common shares over the taxpayer’s basis therein.  This paragraph is qualified in its entirety by the discussion below under the heading “Certain United States Federal Income Tax Considerations.”  Each U.S. shareholder should consult its own tax advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and foreign tax consequences of the PFIC rules and the acquisition, ownership, and disposition of our common shares.
 

 
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Item 4.                 Information on the Company
 
A.           History and Development of the Company
 
Old Lorus was incorporated under the Business Corporations Act (Ontario) on September 5, 1986 under the name RML Medical Laboratories Inc.  On October 28, 1991, RML Medical Laboratories Inc. amalgamated with Mint Gold Resources Ltd., resulting in Old Lorus becoming a reporting issuer (as defined under applicable securities law) in Ontario, on such date.  On August 25, 1992, Old Lorus changed its name to IMUTEC Corporation.  On November 27, 1996, Old Lorus changed its name to Imutec Pharma Inc., and on November 19, 1998, Old Lorus changed its name to Lorus Therapeutics Inc.  On October 1, 2005, Old Lorus continued under the Canada Business Corporations Act.
 
On the Arrangement Date, Old Lorus completed a plan of arrangement and corporate reorganization with, among others, 6650309 Canada Inc. (“New Lorus”), 6707157 Canada Inc. and Pinnacle International Lands, Inc.  As a result of the plan of arrangement and reorganization each common share of Old Lorus was exchanged for one common share of New Lorus.   New Lorus continued the business of Old Lorus after the Arrangement Date with the same officers and employees and continued to be governed by the same board of directors as Old Lorus prior to the Arrangement Date. References in this Annual Report to the Company, Lorus, “we”, “our”, “us” and similar expressions, unless otherwise stated, are references to Old Lorus prior to the Arrangement Date and New Lorus after the Arrangement Date.
 
The address of the Company’s head and registered office is 2 Meridian Road, Toronto, Ontario, Canada, M9W 4Z7.  Our corporate website is www.lorusthera.com.  The contents of the website are specifically not included in this annual report by reference.
 
Our common shares are listed on the TSX under the symbol “LOR”. Our shares are quoted on the OTCBB under the symbol  under the symbol “LRUSF”.
 
Lorus currently has one subsidiary, NuChem Pharmaceuticals Inc., a corporation incorporated under the laws of Ontario, of which Lorus owns 80% of the issued and outstanding voting share capital and 100% of the issued and outstanding non-voting preference share capital. Effective May 31, 2009, the Company wound up GeneSense Technologies Inc., a corporation incorporated under the laws of Canada, of which Lorus owned 100% of the issued and outstanding share capital into Lorus.  On June 22, 2009, the Company transferred its ownership in Pharma Immune Inc. to The Erin Mills Investment Corporation as part of the consideration provided on the repurchase of the convertible debentures.
 
Lorus Therapeutics Inc. is a biopharmaceutical company focused on the discovery, research and development of novel anticancer therapies with a high safety profile. Lorus has worked to establish a diverse, marketable anticancer product pipeline, with products in various stages of development ranging from discovery and pre-clinical to preparation for initiation of a Phase III clinical trial. A growing intellectual property portfolio supports our diverse product pipeline.
 
Our success is dependent upon several factors, including establishing the efficacy and safety of our product candidates in clinical trials, securing strategic partnerships, obtaining the necessary regulatory approvals to market our products and maintaining sufficient levels of funding through public and/or private financing.
 
We believe that the future of cancer treatment and management lies in drugs that are effective, have minimal side effects, and therefore improve a patient’s quality of life. Many of the cancer drugs currently approved for the treatment and management of cancer are toxic with severe side effects, and we believe that a product development plan based on effective and safe drugs could have broad applications in cancer treatment.  Lorus’ strategy is to continue the development of our product pipeline using several therapeutic approaches. Each therapeutic approach is dependent on different technologies, which we believe mitigates the development risks associated with a single technology platform. We evaluate the merits of each product candidate throughout the clinical trial process and consider partnership when appropriate.
 

 
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Over the past three years, we have focused on advancing our product candidates through pre-clinical and clinical testing. It costs millions of dollars and takes many years before a product candidate may be approved for therapeutic use in humans and the risk exists that a product candidate may not meet the end points of any Phase I, Phase II or Phase III clinical trial. See “Risk Factors”.
 
RNA-Targeted Therapies
 
Lorus’ RNA-targeted therapeutics include LOR-2040, which has recently completed an advanced Phase II clinical trial, and LOR-1284, which is in the pre-clinical stage of development. See “-- Clinical Development” and “Business of the Company - DNA/RNA-based Therapeutics”.
 
Small Molecule
 
We have small molecule drug screening technologies and preclinical scientific expertise, which we are using to create a drug candidate pipeline. Our proprietary group of small molecule compounds, which include the lead compound LOR-253, have unique structures and modes of action, and are promising candidates for the development of novel, targeted anticancer agents with high safety profiles.  See “-- Clinical Development” and “Business of the Company - Small Molecule Therapies”.
 
Immunotherapy
 
In June 2009, as part of the consideration for the repurchase of the secured convertible debentures from The Erin Mills Investment Corporation, Lorus’ assigned to The Erin Mills Investment Corporation its rights under the license agreement with ZOR Pharmaceuticals, LLC, and sold to The Erin Mills Investment Corporation its intellectual property rights associated with Virulizin®. See “-- Business of the Company - Immunotherapy” and “The Company - Secured Convertible Debentures” for more details. Lorus also has a drug candidate Interleukin-17E which is a protein-based therapeutic that Lorus is developing as an immunotherapy for cancer treatment.  See “-- Clinical Development”, “Business of the Company - Immunotherapy” and “The Company - Secured Convertible Debentures” for more details.
 

 
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Clinical Development
 
The chart below illustrates our current view of the clinical development stage of each of our products.  This chart reflects the current regulatory approval process for biopharmaceuticals in Canada and the United States.  See “Regulatory Requirements” for a description of the regulatory approval process in Canada and the United States. These qualitative estimates of the progress of our products are intended solely for illustrative purposes and this information is qualified in its entirety by the information appearing elsewhere or incorporated by reference in this annual report.
 

 
Capital Expenditures and Divestitures
 
N/A
 
B.           Business Overview
 
Overview
 
Chemotherapeutic drugs have been the mainstay medical treatment option for cancer, particularly metastatic cancer, for the past 30 years. More recently, a range of novel cancer drugs have been developed that are efficacious while improving patient quality of life.  Unlike chemotherapies, which are typically based on chemical synthesis, these new drugs may be of biological origin, based on naturally occurring molecules, proteins or genetic material. While conventional chemotherapy drugs are relatively non-specific and as a result toxic to normal cells, these new generation agents specifically target individual molecules or genes that are involved in disease and are therefore preferentially toxic to tumor cells.  The increased targeted specificity of these drugs may result in fewer and milder side effects, meaning that, in theory, larger and therefore, more effective doses can be administered. The current paradigm in cancer management is a multi-modal approach that combines multiple treatment options tailored to the specific indication and individual patient. As a result, targeted drug regimens that combine novel small molecule therapies with biological agents, based on emerging understanding of cancer development, are of considerable and growing interest.
 

 
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Since cancer progression is a complex process involving the accumulation of multiple genetic alterations leading to changes in many specialized cell functions, Lorus believes that no single drug will emerge as a cure for all cancers.  Instead, we believe that cancer will continue to be treated by many different drugs with a variety of mechanisms of action.  Since Lorus takes a multi-mechanistic approach for the treatment of cancer, we concentrate on the discovery and the development of different classes of anticancer compounds.
 
All of the drugs being developed by the research team at Lorus have one similar characteristic: they are designed with the goal of being well tolerated by patients. These drugs may not only provide effective cancer treatment and contribute to an improved quality of life for cancer patients, but may also be commercially attractive as they could more easily be combined with other leading therapies without significantly adding to the current side effect profiles of existing drugs.
 
Lorus has product candidates in three classes of anticancer therapies: (i) RNA-targeted therapies; (ii) small molecule therapies; and (iii) immunotherapeutics. Lorus  has certain commercial rights in Virulizin™ as described in “Immunotherapy”.
 
 RNA-Targeted Therapies
 
Introduction
 
Metabolism, cell growth and cell division are tightly controlled by complex protein signalling pathways in response to specific conditions, thereby maintaining normal function. Many human diseases, including cancer, can be traced to faulty protein production and/or regulation. As a result, traditional therapeutics is designed to interact with the disease-causing proteins and modify their function. A significant number of current anticancer drugs act by damaging either DNA or proteins within cells (e.g., chemotherapy) or by inhibiting the function of proteins or small molecules (e.g. estrogen blockers, such as Tamoxifen). RNA-targeted therapeutics offer a novel approach to treatment in that they are designed to prevent the production of proteins causing disease.
 
Our RNA-targeted drugs consist of antisense drugs and short-interfering RNA (siRNA).  The premise of this therapeutic approach is to target an earlier stage of the biochemical process than is usually possible with conventional drugs. The blueprint for protein production is encoded in the DNA of each cell. To translate this code into protein the cell first produces mRNAs (messenger ribonucleic acids) specific to each protein and these act as intermediaries between the information encoded in DNA and production of the corresponding protein. Most traditional therapies interact with the final synthesized or processed protein.  Often this interaction lacks specificity that would allow for interaction with only the intended target, resulting in undesired side effects.  In contrast, this newer approach is based on altering gene expression at the mRNA level, prior to protein synthesis, and is intended to achieve better drug specificity towards the biochemical target.  We believe that drugs based on this approach may have broad applicability, greater efficacy and fewer side effects than conventional drugs.
 
We have developed a number of antisense drugs, of which our lead product is LOR-2040 (formerly GTI-2040).  LOR-2040 targets the R2 component of ribonucleotide reductase (“RNR”). RNR is a highly regulated, cell cycle-controlled protein required for DNA synthesis and repair.  RNR is made up of two components, R1 and R2, encoded by different genes. RNR is essential for the formation of deoxyribonucleotides, which are the building blocks of DNA.  Since RNR activity is highly elevated in tumor cell populations and is associated with tumor cell proliferation, we have developed antisense molecules specific for the mRNA of the R2 (LOR-2040) component of RNR. Furthermore, the R2 component also appears to be capable of acting as a signal molecule in cancer cells and its elevation is believed to modify a biochemical pathway that can increase the malignant properties of tumor cells. Consequently, reducing the expression of the RNR components in a tumor cell with antisense drugs is expected to have antitumor effects.
 
LOR-2040
 
Our lead antisense drug candidate is LOR-2040, which targets the R2 component of RNR and has exhibited antitumor properties against over a dozen different human cancers in standard mouse models, including chemotherapy resistant tumors. We have completed a Phase I/II clinical trial of LOR-2040 for advanced or metastatic renal cell carcinoma.  We are also conducting or have completed multiple Phase I/II clinical trial programs in cooperation with the U.S. National Cancer Institute (“NCI”), for the study of LOR-2040 for the treatment of Acute Myeloid Leukemia (“AML”), breast cancer, lung cancer, colon cancer, prostate cancer, a series of solid tumors and myelodysplastic syndrome and acute leukemia.
 

 
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In June 2009, we announced the publication of an article entitled, “A LC-MS/MS Method for the Analysis of Intracellular Nucleoside Triphosphate Levels” in the peer-reviewed journal Pharmaceutical Research. In the article investigators at the Ohio State University presented data showing the pharmacological activity of LOR-2040 in five leukemia cell lines and in bone marrow samples of a patient with AML treated with LOR-2040 in a Phase II clinical trial. The tumor cells examined with the novel analytical method showed a significant decrease in intracellular deoxynucleoside triphosphate levels required for DNA synthesis, confirming the target inhibition effect of LOR-2040.
 
In November 2009, we announced that a Phase II clinical trial in refractory and relapsed AML with LOR- 2040 in combination with cytarabine had been successfully completed to the end-of-stage assessment time point, with favorable results. The Steering Committee review required at this stage determined that the Phase II efficacy and safety results fulfilled the protocol criteria for continued patient enrolment and were consistent with the promising Phase Ib clinical findings in relapsed and refractory AML. It was further agreed that based on the strength of the Phase Ib and II clinical data in a total of 48 patients treated in this indication, expansion to a definitive comparative trial was the most appropriate next step to support registration. On this basis we are proceeding with protocol development for the expanded development program. It is notable that the current preliminary evaluation found the response rate to be twice that expected from a risk-matched historical control, and that this is consistent with a further similar analysis of the findings from the prior Phase Ib clinical study.
 
In June 2010, we announced the presentation of Phase II clinical trial data for LOR-2040 in combination with high dose cytarabine in the treatment of AML. The presentation assessed the safety and efficacy data from the recently completed Phase II clinical trial. This Phase II study was conducted at six major U.S. cancer centers under the overall direction of Principal Investigator Dr. Klisovic at the Arthur G. James Cancer Hospital, Ohio State University. The investigators concluded that the favorable safety and efficacy demonstrated in the Phase II clinical study, and in the prior Phase Ib clinical trial in similar high risk AML patients, merits further development of LOR-2040 in combination with HiDAC in a larger randomized clinical trial.
 
LOR-1284
 
In 2003, Lorus began development of an anticancer therapeutic based on siRNA-mediated inhibition of R2 expression. Early screening experiments have identified lead compounds and preliminary in vitro and in vivo characterization of these compounds has yielded promising results.  LOR-1284 (formerly siRNA-1284), the lead compound identified from the screening study, specifically targets R2 expression. In in vitro studies, down-regulation of R2 expression by LOR-1284 resulted in decreased   tumor cell growth (proliferation) with a concomitant block in cell cycle progression. Furthermore, LOR-1284 demonstrates anti-tumor activity against human kidney, skin and colon cancers in mouse experimental models of tumor growth. We feel that the results of these studies warrant further development of LOR-1284 as well as expansion of siRNA research to other cancer targets. Although in published reports LOR-1284 has shown significant in vivo anti-tumor activity on its own, we are collaborating with investigators at Ohio State University to develop a novel nanotechnology formulation based on LOR-1284 to enhance uptake of the drug in tissues and to provide a selective affinity for specific tumors. Research is continuing to optimize delivery of siRNA in vivo, and is expected to be the key to the future therapeutic promise of siRNA therapeutics to effectively target specific genes associated with cancer.
 
Clinical Development
 
NCI Sponsored Trials
 
Program in Solid Tumors and Other Indications
 
Following completion by Lorus in the prior period of a Phase I dose escalation trial in solid tumors and a Phase I/II trial of LOR-2040 in combination with capecitabine in renal cell carcinoma, much of the clinical development for LOR-2040 was performed in conjunction with the NCI, which paid for the cost of the sponsored clinical trials. See “-- Agreements - Collaboration Agreements - National Cancer Institute”. To date we have completed six clinical trials with the NCI for LOR-2040 in patients with AML, metastatic breast cancer, non-small cell lung cancer, solid tumors, unresectable colon cancer, hormone refractory prostate cancer and have one study ongoing in MDS and acute leukemia. These indications were selected based on the most promising results from our preclinical studies. Upon evaluation of the final clinical data emerging from the completed NCI clinical trials, Lorus will analyze and make decisions regarding the strategic direction of our antisense portfolio. We do not believe that the data obtained from these trials will be material nor impact our current development plan of focusing on LOR-2040 in AML. Lorus continues to search for partnerships for the future development of LOR-2040.
 

 
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High Grade Myelodysplastic Syndrome and acute leukemia
 
Lorus announced in June 2006 a plan for a new clinical investigation of LOR-2040 as a single-agent in patients with high grade myelodysplastic syndrome and acute leukemia as an additional NCI-sponsored initiative. This trial was initiated in mid 2007. This clinical study is designed to evaluate the safety and activity of LOR-2040 as a single agent for acute leukemia and MDS using a novel treatment schedule. The effect on leukemic blasts and blood count recovery will be assessed as part of a detailed investigation of the pharmacodynamic and pharmacokinetic effects, dose-response relationships and tolerability of LOR-2040 during multiple courses of treatment. This clinical trial is now ongoing but fully enrolled and pending analysis and final reporting.
 
Other Research Initiatives
 
In May 2009, Lorus announced the extension of a cooperative research agreement with the NCI for preclinical evaluation of LOR-2040 and other Lorus RNA-targeted drugs as part of a novel combination therapeutic strategy to target the renal tumor and not the normal regenerating kidney.
 
Acute Myeloid Leukemia: NCI Sponsored Trial Program
 
In July 2003, we announced the FDA’s approval of the NCI-sponsored Investigational New Drug application for a clinical trial of LOR-2040 in combination with cytarabine, in patients with refractory or relapsed AML. Cytarabine is the current established drug for treating AML patients.  The study is part of a Phase II clinical program to be conducted under the sponsorship of the Cancer Treatment Evaluation Program of the NCI pursuant to a clinical trial agreement between Lorus and the NCI.
 
In August 2007, we announced the completion of this study. This clinical trial demonstrated safety and appropriate dosing of the combination regimen and showed promising clinical responses in patients under 60 years of age.  Moreover, the clinical responses correlated with downregulation of R2, the cellular target of LOR-2040, and were further supported by demonstration of intracellular LOR-2040 in circulating and bone marrow leukemic cells. In July 2008, we announced publication of the final results of this clinical trial by the investigators in the journal Clinical Cancer Research 14(12) 2008. The results demonstrated safety and appropriate dosing of the combination regimen. Notably, promising clinical responses in patients under 60 years of age were obtained which included complete responses in 35% of the 23 patients and significant cytoreduction of the leukemic blasts in two others. Moreover, the clinical responses correlated with down regulation of R2, the cellular target of LOR-2040 in circulating and bone marrow leukemic cells. Additionally, outcomes of complete response were associated with high pre-treatment levels of R2, suggesting that pre-treatment R2 may be a predictor of response and a possible basis for treatment stratification to this LOR-2040 and cytarabine combination.  This proof of concept study provided the basis for proceeding to the current larger Phase II study in with the same regimen in patients less than 60 years of age with refractory and relapsed AML.
 
Additional research in this program has continued to add scientific support for action of LOR-2040 in AML. In September 2008, Lorus announced a further publication by the investigators presenting results on the metabolism of LOR-2040 in these AML patients along with supporting experiments. This identified factors including activity of liver microsomes that together predicted the circulating drug levels and clearance rates. The investigators also performed additional studies to further elucidate the intracellular activity of LOR-2040 in AML which were announced by Lorus in April 2009 following the presentation to the American Association for Cancer Research, and in June 2009 following their final publication of this data in Pharmaceutical Research 26(6) 2009. A novel analytical method was used to monitor the intracellular activity of LOR-2040 in both preclinical models and in a patient’s samples and confirm an important mechanism of action of the drug to reduce the dNTP molecules in tumor cells that are required for DNA synthesis.
 

 
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Acute Myeloid Leukemia: Lorus Sponsored Trial Program
 
In August 2007, we announced an expansion of the LOR-2040 development program in the AML indication with initiation of a more advanced Phase II clinical trial with LOR-2040 and high dose Ara-C (“HiDAC”) in refractory and relapsed AML. The decision to advance clinical development of LOR-2040 into Phase II was based on the encouraging results from our completed proof of concept NCI-sponsored study of LOR-2040 in combination with HiDAC in patients with refractory and relapsed AML. This Phase II study included both an efficacy study and a novel additional study to measure intracellular target activities and pharmacological synergies between the two agents. In the first stage of the 60 patient trial, the pharmacologic and target related activity of LOR-2040 and HiDAC was evaluated in two groups, to determine the contribution of each agent alone and in combination. The second stage of the trial was to provide efficacy evaluation in a larger patient population.
 
On November 30, 2009, we announced successful completion of the Phase II end of stage assessment of LOR-2040 in combination with high dose Ara-C (HiDAC) as salvage therapy in refractory/relapsed AML patients of 60 years of age or younger with favorable results. The Steering Committee review required at this stage determined that the Phase II efficacy and safety results fulfilled the protocol criteria and are consistent with the promising Phase Ib clinical findings. It was further determined on the strength of the Phase Ib and II clinical data that expansion to a definitive comparative trial is the appropriate next step to support registration. A preliminary evaluation found the response rate to be twice that expected from a risk-matched historical control.
 
On June 14, 2010, we announced presentation of Phase II clinical trial data for LOR-2040 in combination with high dose cytarabine in the treatment of AML at the 15th Annual Congress of the European Hematology Association in Barcelona, Spain. This showed in patients under 60 years of age with relapsed and refractory AML that 28% achieved complete remission (“CR”) or CR with incomplete blood count recovery (“CRi”) and an additional 4% achieved partial remission. The investigators noted that this compares favorably with the expected risk-matched historical CR rate of approximately 14% in this high risk AML patient group. In addition, 12-month overall survival of 41% was shown with median overall survival of 10.3 months, assessed as favorable in this predominantly high risk population, and merits further development in a larger randomized clinical trial.
 
Based on the data from two completed Phase Ib and II clinical trials, Lorus plans to move this clinical program to a larger, randomized, comparative trial in a multinational setting in order to achieve rapid enrolment.
 
On August 5, 2009, we announced the allowance of a patent from the Japan Patent Office for LOR-2040 which protects LOR-2040 composition and its use in treatment of cancer. On May 3, 2010, we announced allowance of a new patent in Australia for LOR-2040 in treatment of AML as a single agent and in combination therapies with cytarabine, which extends the patent life in Australia to 2024.
 
Orphan Drug Status
 
In May 2005, Lorus received orphan drug designation from the FDA for LOR-2040 in the treatment of AML. In June 2008, Lorus announced that the European Medicines Agency had granted orphan drug designation to LOR-2040 for development in AML.
 
Small Molecule Therapies
 
Most anticancer chemotherapeutic treatments are DNA damaging, cytotoxic agents, designed to act on rapidly dividing cells.  Treatment with these drugs is typically associated with unpleasant or even serious side effects due to the inability of these drugs to differentiate between normal and cancer cells and/or due to a lack of high specificity for the targeted protein.  In addition, these drugs often lead to the development of tumor-acquired drug resistance. As a result of these limitations, a need exists for more effective anticancer drugs.  One approach is to develop small molecules that have greater target specificity and are more selective against cancer cells.  Chemical compounds weighing less than 1000 daltons (a unit of molecular weight) are designated as small or low molecular weight molecules. These molecules can be designed to target specific proteins or receptors that are known to be involved with disease.
 

 
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LOR-253
 
Lorus has selected two leading small molecule compounds from a series of novel small molecules discovered by our scientists that exhibit potent anticancer activity in in vitro screens. The results of characterization studies on one of these compounds were published in Cancer Chemotherapy and Pharmacology. From these two compounds, LOR-253 was selected as the lead compound for development as a drug candidate for the treatment of colon carcinoma and non-small cell lung cancer. This decision was based on its potent in vitro anti-proliferative activity, its efficacy in in vivo xenograft models of human colon and lung cancer, and on its safety profile.
 
In September 2009, we announced the publication from our research team of an article entitled “A Novel Small Molecule with Potent Anticancer Activity Inhibits Cell Growth by Modulating Intracellular Labile Zinc Homeostasis” in the peer-reviewed journal Molecular Cancer Therapeutics. The article presented data from the preclinical evaluation of ML-133, a parent compound that was a precursor in the development of LOR-253. The studies demonstrated potent anticancer activity in cancer cell lines and in an animal model of human colon cancer. Further examinations on the mechanism of action confirmed target dependent induction of the novel tumor suppressor called Krüppel-like factor 4, a critical checkpoint protein that inhibits cell cycle progression in several cancer types. The mechanism of activity of this promising new class of antitumor agent described in the publication suggested a novel method for treating several different types of cancer.
 
Lorus has completed formal Good Lab Practises (GLP) toxicology studies for LOR-253 and in April 2010, we announced that the production of the first clinical batch of LOR-253 had been successfully completed. The clinical batch of LOR-253 was manufactured in full compliance with current Good Manufacturing Practice and is to be used in the Phase I study.
 
On June 1, 2010, Lorus announced the filing of an Investigational New Drug application with the FDA which was for a first-in-man Phase I dose escalation trial in advanced or metastatic solid tumors.
 
Lorus is also pursuing other candidates at earlier stages of development. These include:
 
 
Ÿ
LOR-264, a second generation LOR-253 derivative, is being developed for oral administration. Like LOR-253, LOR-264 has demonstrated potent anticancer activity in animal studies and represents the lead oral drug in this development platform. Derivatives of LOR-264 are currently being assessed for anticancer activity and oral bioavailability as part of our lead optimization process.
 
 
Ÿ
LOR-500 platform. LOR-500 targets multikinases including tyrosine kinase family members and a member of the calcium/calmodulin dependent protein kinase family. Hit-to-lead optimization of LOR-500 is being currently conducted to identify a lead drug candidate.
 
 
Ÿ
LOR-220 platform. LOR-220 is a novel compound that targets novel bacterial Ser/Thr kinases. Structural optimization of LOR-220 is currently underway to identify several novel drug candidates that show potent antimicrobial activity in animal models. In October 2010, a patent was allowed in the United States covering composition of matter of LOR-220 and related small molecules
 
In July, 2010, Lorus announced the approval of the Investigational New Drug application for LOR-253 by the FDA. Based on the approval of the IND by the FDA, Lorus plans to proceed with a first-in-man Phase I dose escalation trial with LOR-253 in advanced or metastatic solid tumors. The trial will assess the safety profile, tolerability, and antitumor activity of LOR-253 in cancer patients, as well as pharmacokinetic and pharmacodynamic properties of LOR-253. The Phase I trial will be conducted at Memorial Sloan-Kettering Cancer Center in New York, NY.
 
Immunotherapy
 
Immunotherapy is a form of treatment that stimulates the body’s immune system to fight diseases including cancer.  Immunotherapy may help the immune system to fight cancer by improving recognition of differences between healthy cells and cancer cells. Alternatively it may stimulate the production of specific cancer fighting cells.
 

 
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Interleukin-17E
 
Interleukin-17E (“IL-17E”) is a protein-based therapeutic that Lorus is developing as an immunotherapy for cancer treatment. We have shown that IL-17E has anticancer activity against a range of human cancers. In February 2010, we announced the publication of an article entitled “IL-17E, a proinflammatory cytokine, has antitumor efficacy against several tumor types in vivo”, in the peerreviewed journal Cancer Immunology Immunotherapy. In this article, we demonstrated the antitumor effects of IL-17E alone and in combination with a number of approved anticancer agents in preclinical models. The studies showed that IL-17E alone had potent antitumor activity in a number of solid tumors, including melanoma, breast, colon, pancreatic, and non-small cell lung cancers. In combination studies, IL-17E was compatible with a wide variety of approved anticancer drugs, including Avastin, Tarceva, Taxol, Cisplatin, Dacarbazine, Irinotecan, and Gemzar. Furthermore, the combination of IL-17E with each of these anticancer agents showed greater anticancer efficacy than either agent alone without additional toxicity. The article also provided data on the mechanism of anticancer activity for IL-17E, showing that IL-17E activated the immune system, specifically acting on eosinophils and B cells.
 
Additional preclinical studies are being done to further evaluate the efficacy and toxicity profile of IL-17E in comparison to other cancer-approved cytokines, including interferon-alpha and IL-2, and further nonclinical studies are planned to assess toxicity and optimize the therapeutic dose.
 
Virulizin™
 
In April 2008, Lorus entered into an exclusive licensing deal with a subsidiary of Zoticon Bioventures’ subsidiary, ZOR Pharmaceuticals, LLC, for Virulizin™. The license, covering North and South America, Europe and Israel, granted Lorus the right to receive in excess of US$10 million in upfront and milestone payments as well as royalties on sales of between 10 and 20%. In addition, Lorus’ wholly-owned subsidiary received a 25% equity interest in ZOR Pharmaceuticals, LLC. ZOR Pharmaceuticals, LLC is responsible for all future clinical developments, regulatory submissions, and all commercial activities. In June 2009, Lorus assigned these rights and the rights to the intellectual property associated with Virulizin™ to The Erin Mills Investment Corporation as part of the consideration for Lorus’ repurchase of the secured convertible debentures. (See “Business Overview - Secured Convertible Debentures”)
 
Agreements
 
Manufacturing Agreements
 
We currently rely upon subcontractors for the manufacture of our drug candidates. The subcontractors manufacture clinical material according to current Good Manufacturing Practice at contract manufacturing organizations that have been approved by our quality assurance department, following audits in relation to the appropriate regulations.
 
Manufactured product for clinical purposes is tested for conformance with product specifications prior to release by our quality assurance department. Current Good Manufacturing Practice batches of our drug candidates are subjected to prospectively designed stability test protocols.
 
License Agreements
 
Ion Pharmaceuticals
 
In December 1997, Lorus, through NuChem Pharmaceuticals Inc., acquired certain patent rights and a sublicense from Ion to develop and commercialize the anticancer applications of CLT and new chemical entities related to CLT (the “NuChem Analogs”).  To July 2006, NuChem Pharmaceuticals Inc. had made cash payments totalling US $500 thousand to Ion.  The balance of up to US$3 million is payable upon the achievement of certain milestones based on the commencement and completion of clinical trials related to the NuChem Analogs. The company does not currently expect to achieve any of the above milestones in fiscal years ending May 31, 2011 or 2012 and cannot reasonably predict when such milestones will be achieved, if at all.
 

 
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The NuChem Analog patents are ancillary to the Company’s primary development activities and do not relate to our core research and development focus, namely LOR-2040, nor did they relate specifically to the development of Virulizin.
 
University of Manitoba
 
The University of Manitoba, Dr. Jim Wright, Dr. Aiping Young and Cancer Care entered into an exclusive license agreement with GeneSense Technologies Inc. dated June 20, 1997 pursuant to which GeneSense was granted an exclusive worldwide license to certain patent rights with the right to sub-license.  In consideration for the exclusive license to GeneSense of the patent rights, the University of Manitoba and Cancer Care are entitled to an aggregate of 1.67% of the net sales received by GeneSense from the sale of products or processes derived from the patent rights and 1.67% of all monies received by GeneSense from sub-licenses of the patent rights. GeneSense is solely responsible for the preparation, filing, prosecution and maintenance of all patent applications and patents included in the patent rights and all related expenses.  Pursuant to the terms of the license agreement, any and all improvements to any of the patent rights derived in whole or in part by GeneSense after the date of the License Agreement are not included within the scope of the license agreement and do not trigger any payment of royalties.
 
The University of Manitoba agreement relates specifically to antisense and related technologies described in patent applications that were pending at the time of the agreement.  Subsequent patent amendments or advancements to these patents remain as the property of Lorus, without license rights accruing back to the University of Manitoba.  The Company is currently pursuing its antisense development program, primarily as a function of advancements and amendments to the original patents. We have not yet earned any revenue from the products covered under the agreement and have not paid any royalties under this agreement and cannot reasonably predict the timing and amount of any future payment.  We do not expect to make any royalty payments under this agreement in fiscal years ending May 31, 2011 or 2012.
 
Effective May 31, 2009, this agreement was assigned from GeneSense Technologies Inc. to Lorus.
 
Collaboration Agreements
 
Zoticon Bioventures Inc.
 
In April 2008, Lorus through its wholly owned subsidiary GeneSense Technologies Inc. signed an exclusive multinational license agreement with ZOR Pharmaceuticals, LLC formed as a subsidiary of Zoticon Bioventures Inc., a research-driven biopharmaceutical group, to further develop and commercialize Virulizin™ for human therapeutic applications. As discussed above, in June 2009, Lorus assigned these rights and the rights to the intellectual property associated with Virulizin® to The Erin Mills Investment Corporation as part of the consideration for Lorus’ repurchase of the secured convertible debentures. (See “Business Strategy - Secured Convertible Debentures”)
 
As part of the Zoticon agreement, we entered into a service agreement in which we agreed to provide ZOR Pharmaceuticals, LLC with 120 hours of consulting service at its own expense and thereafter will provide services at an agreed upon rate. This agreement expired in October 2009.
 
National Cancer Institute
 
In February 2003, Lorus and the NCI approved clinical protocols to conduct a series of clinical trials in a Phase I/II program to investigate the safety and efficacy of LOR-2040. Lorus and the NCI signed a formal clinical trial agreement in which the NCI financially sponsors the LOR-2040 clinical trials, while Lorus provides the clinical trial drug. The agreement was renewed in October 2007 for an additional three years. The studies conducted under this agreement are now complete.
 
In May 2009, Lorus entered into an additional agreement with the NCI for the study of LOR-2501, LOR- 2040, and LOR-1284 in combination with commercially-available drugs, to develop a drug cocktail(s) that is more effective for the treatment of Renal Cell Carcinoma tumors than for normal regenerating kidney.
 

 
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In regards to future payment obligations, Lorus’ obligations under these agreements are limited to the supply of drugs, the cost for which has been incurred. The company does not currently expect any significant costs associated with the supply of the drug in the future, depending on the outcome of the projects.
 
Other
 
From time to time, we enter into other research and technology agreements with third parties under which research is conducted and monies expended.  These agreements outline the responsibilities of each participant and the appropriate arrangements in the event the research produces a product candidate.
 
Business Strategy
 
Our business strategy is based on the identification and development of novel therapies aimed at validated cancer targets. We believe that these target-based approaches hold the promise of more effective therapies with fewer side effects. A target-based approach is increasingly recognized as several targeted agents are already approved by regulatory authorities around the globe. In order to minimize single technology-related risks, we have adopted three different technology approaches:
 
 
1.
RNA-targeted technologies such as antisense and siRNA.
 
 
2.
Development of small molecules that recognize specific targets in cancer cells.
 
 
3.
Immunotherapy using safe and efficacious products to stimulate the natural anticancer properties of the immune system.
 
The first two approaches utilize selection strategies for identification and development of highly specific targeted drug candidates, capitalizing on proprietary libraries of compounds developed in-house.
 
In our efforts to obtain the greatest return on our investment in each drug candidate, we separately evaluate the merits of each drug candidate throughout the clinical development process and consider commercialization opportunities when appropriate.  In the next fiscal year, we intend to pursue partnerships for our lead compounds and further the development of our promising pipeline.  More specifically, our main objectives are (i) to maximize the therapeutic value and potential commercial success of LOR-2040 by initiating a Phase III registration clinical trial in AML in collaboration with a co-development or licensing partners (such partners or collaborators have not yet been secured); (ii) to conduct a Phase I clinical trial of our lead small molecule drug, LOR-253; and (iii) to commit resources to advancing our in-house pipeline of novel preclinical drug candidates.
 
Financial Strategy
 
To meet future financing requirements, we intend to finance our operations through some or all of the following methods: public or private equity financings, and collaborative and licensing agreements.  We intend to pursue financing opportunities as they arise.
 
Rights Offering and Financing Commitment
 
Subsequent to the year ended May 31, 2010, due to unfavourable market conditions, the Company withdrew a previously announced equity issue.
 
On September 27, 2010 Lorus filed a final short form prospectus in each of the provinces of Canada in connection with a distribution to its shareholders in eligible jurisdictions outside the United States of rights exercisable for units of the Company.
 
Under the Rights Offering, holders of common shares of the Company as of October 12, 2010, the record date, received one right for each common share held as of the record date. Each two rights entitled the holder thereof to purchase a unit of the Company at a price of $1.11 per unit. The subscription price of $1.11 per unit represents a discount of 10% to the volume weighted average closing price of the Company’s shares for the five trading days immediately prior to filing of the final prospectus. Each unit consists of one common share of the Company and one warrant to purchase an additional common share of the Company at a price of $1.33 until May 2012. If at any time after 6 months following November 9, 2010 the price of Lorus’ common shares on the TSX equals or exceeds $2.33 for five consecutive trading days, Lorus may call the warrants for cancellation. The expiry date for the rights offering was 5:00 P.M. (Eastern) on November 8, 2010.
 

 
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A total of 4.2 million units of the Company at a price of $1.11 per unit were issued in connection with the rights offering. As a result of the rights offering Lorus issued 4.2 million common shares and 4.2 million common share purchase warrants.
 
In connection with the rights offering, the Company secured a standby purchase arrangement of $4 million by Herbert Abramson, one of Lorus’ directors. Mr. Abramson agreed to make an investment such that the minimum gross proceeds of the proposed rights offering would be $4 million. No fee was payable to Mr. Abramson for this commitment. In accordance with the terms of the stand-by purchase agreement, Mr. Abramson subscribed for 3.6 million of the 4.2 million units of the offering for $4.0 million.
 
The Company used some of  the proceeds to repay the $1.5 million interim financing promissory notes to Mr. Abramson as well as to prepay the $1 million promissory note outstanding to Trapeze Capital Corporation, a corporation affiliated with Mr. Abramson.  The Company expects to use the remaining proceeds from the offering to fund research and development activities and for general working capital purposes. Following these transactions the Company has no debt other than trade accounts payables.
 
Share Consolidation
 
At our annual and special meeting of shareholders held on November 30, 2009, our shareholders approved a special resolution permitting our board of directors, in its sole discretion, to file an amendment to our articles of incorporation to consolidate our issued and outstanding common shares.
 
On May 12, 2010, our board approved the share consolidation on the basis of one post-consolidation common share for every 30 pre-consolidation common shares. The record date and effective date for the share consolidation was May 25, 2010. Our common shares began trading on the TSX on a postconsolidation basis on May 31, 2010, and were quoted on the OTCBB on a post-consolidation basis beginning on June 1, 2010. The share consolidation resulted in an adjustment to the exercise price and number of common shares issuable upon exercise of outstanding stock options and warrants.
 
In this annual report, all references to number of shares, stock options and warrants in the current and past periods have been adjusted to reflect the impact of the consolidation unless noted otherwise.
 
Promissory Notes
 
On August 27, 2010 the Company announced  that a director of the Company Mr. Abramson  would provide the Company with interim financing by way of three $500 thousand monthly loans, advanced on August 11, 2010, September 13, 2010 and October 5, 2010.  The loans were unsecured, have a six-month term (or the earlier of the closing of the rights issue) and bore interest at the annual rate of 10%.  All three notes were repaid upon the close of the rights offering described above.
 
In April 2010, the Company entered into a loan agreement with Trapeze Capital Corporation, a corporation affiliated with Mr. Abramson, to borrow $1 million. The loan amount, which was received on April 14, 2010, is unsecured, evidenced by a promissory note and bears interest at the annual rate of 10%. The funds were used for general working capital purposes. Lorus decided to prepay the $1.0 million promissory note outstanding to Trapeze Capital Corporation with the proceeds of the rights offering described above.
 
In October 2009, the Company entered into a loan agreement with Mr. Abramson to borrow $1 million. The loan amount, which was received on October 6, 2009, was unsecured, evidenced by a promissory note and bears interest at the annual rate of 10%. The principal and interest was due in six months. The principal amount of $1.0 million was applied to subscribe for units as part of the November 27, 2009 private placement described below.
 
Share Issuances
 
On November 27, 2009, pursuant to a private placement, the Company issued 41.0 million (preconsolidation) common shares and 20.5 million (pre-consolidation) common share purchase warrants in exchange for cash consideration of $2.5 million. This amount includes the principal amount of $1.0 million originally received by way of a loan from a director on October 6, 2009 which was applied to subscribe for units as part of the private placement. In addition, the Company issued 2.2 million (pre-consolidation) brokers’ warrants to purchase an equivalent number of common shares at $0.08 (pre-consolidation) until May 27, 2011.
 

 
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Secured Convertible Debentures
 
On October 6, 2004, the Company entered into a Subscription Agreement with The Erin Mills Investment Corporation to issue an aggregate of $15.0 million of secured convertible debentures issuable in three tranches of $5.0 million each, in each of, October 2004, January 2005 and April 2005. The debentures were due on October 6, 2009.
 
On June 22, 2009, the Company reached a settlement with The Erin Mills Investment Corporation with respect to the purchase and settlement of the $15.0 million the Debentures.
 
Under the settlement agreement, Lorus purchased all of the debentures from The Erin Mills Investment Corporation for a cash payment of $3.3 million, the assignment of the rights under the license agreement with ZOR Pharmaceuticals, LLC, sale of intellectual property associated with Virulizin and sale of Lorus’ shares in its wholly-owned subsidiary Pharma Immune Inc. which holds an equity interest in ZOR. Under the agreement, Lorus is entitled to 50% of any royalties received under the ZOR license agreement and 50% of the deal value of any transaction completed in territories not covered by the ZOR license agreement. Lorus also retains a perpetual, royalty free license for the animal use of Virulizin. The Erin Mills Investment Corporation will be fully responsible for all clinical and regulatory costs associated with commercialization of Virulizin in territories not covered by the ZOR license agreement. Lorus will assist The Erin Mills Investment Corporation with certain agreed upon services.
 
For receipt of the intellectual property associated with Virulizin and all of Lorus’ shares in Pharma Immune Inc., The Erin Mills Investment Corporation released all security interest in the assets of Lorus.
 
Intellectual Property and Protection of Confidential Information and Technology
 
We believe that our issued patents and pending applications are important in establishing and maintaining a competitive position with respect to our products and technology.  As of May 31, 2010, we owned or had rights to 18 issued patents and 39 pending patent applications worldwide.
 
RNA-targeted Therapies
 
We have been issued two patents in Canada, nine patents in the United States and twelve patents in other jurisdictions around the world relating to our DNA/RNA-based therapeutics, which includes antisense and siRNA molecules.  We also have 13 pending patents worldwide for this class of therapies. These patents include composition of matter and method claims.
 
Small Molecule
 
We have been issued three patents and have 23 pending patents worldwide for out in-house small molecules.  These patents cover composition of matter and method claims.
 
Immunotherapy
 
We have three pending patents for our IL-17E immunotherapy program.
 
Risks Relating to Intellectual Property
 
We either own these issued patents discussed above or have the exclusive right to make, use, market, sell or otherwise commercialize products using these patents to diagnose and treat cancer. We cannot assure you that we will continue to have exclusive rights to these patents.
 
We cannot assure you that pending applications will result in issued patents, or that issued patents will be held valid and enforceable if challenged, or that a competitor will not be able to circumvent any such issued patents by adoption of a competitive, though non-infringing product or process.  Interpretation and evaluation of pharmaceutical or biotechnology patent claims present complex and often novel legal and factual questions.  Our business could be adversely affected by increased competition in the event that any patent granted to it is held to be invalid or unenforceable or is inadequate in scope to protect our operations.
 

 
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While we believe that our products and technology do not infringe proprietary rights of others, we cannot assure you that third parties will not assert infringement claims in the future or that such claims will not be successful.  Furthermore, we could incur substantial costs in defending ourselves against patent infringement claims brought by others or in prosecuting suits against others.
 
In addition, we cannot assure you that others will not obtain patents that we would need to license, or that if a license is required that it would be available to us on reasonable terms, or that if a license is not obtained that we would be able to circumvent, through a reasonable investment of time and expense, such outside patents.  Whether we obtain a license would depend on the terms offered, the degree of risk of infringement, the vulnerability of the patent to invalidation and the ease of circumventing the patent.
 
Until such time, if ever, that further patents are issued to us, we will rely upon the law of trade secrets to the extent possible given the publication requirements under international patent treaty laws and/or requirements under foreign patent laws to protect our technology and our products incorporating the technology.  In this regard, we have adopted certain confidentiality procedures.  These include: limiting access to confidential information to certain key personnel; requiring all directors, officers, employees and consultants and others who may have access to our intellectual property to enter into confidentiality agreements which prohibit the use of or disclosure of confidential information to third parties; and implementing physical security measures designed to restrict access to such confidential information and products. Our ability to maintain the confidentiality of our technology is crucial to our ultimate possible commercial success.  We cannot assure you that the procedures adopted by us to protect the confidentiality of our technology will be effective, that third parties will not gain access to our trade secrets or disclose the technology, or that we can meaningfully protect our rights to our technology.  Further, by seeking the aforementioned patent protection in various countries, it is inevitable that a substantial portion of our technology will become available to our competitors, through publication of such patent applications.
 
Regulatory Strategy
 
Our overall regulatory strategy is to work with Health Canada, the federal government department which, among other responsibilities, regulates the use and sale of therapeutic drug products in Canada and the FDA in the United States, the European Medicines Agency in Europe, and any other local regulatory agencies to have drug applications approved for the use of LOR-2040, and small molecules in clinical trials (alone and/or in combination with chemotherapeutic compounds) and subsequently for sale in international markets. Where possible, we intend to take advantage of opportunities for accelerated consideration of drugs designed to treat rare and serious or life-threatening diseases. We also intend to pursue priority evaluation of any application for marketing approval filed in Canada, the United States or the European Union and to file additional drug applications in other markets where commercial opportunities exist. We cannot assure you that we will be able to pursue these opportunities successfully.
 
Revenues
 
The Company has not earned substantial revenues from its drug candidates and is therefore considered to be in the development stage.
 
Employees
 
As at May 31, 2010, we employed 17 full-time persons and three part-time people in research and drug development and administration activities. Of our employees, seven hold Ph.D.s.  To encourage a focus on achieving long-term performance, employees and members of the board of directors have the ability to acquire an ownership interest in the Company through Lorus’ stock option and alternative compensation plans and employees can participate in the employee share purchase plan.
 
Our ability to develop commercial products and to establish and maintain our competitive position in light of technological developments will depend, in part, on our ability to attract and retain qualified personnel. There is a significant level of competition in the marketplace for such personnel. We believe that to date we have been successful in attracting and retaining the highly skilled personnel critical to our business. We have also chosen to outsource activities where skills are in short supply or where it is economically prudent to do so.
 

 
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None of our employees are unionized, and we consider our relations with our employees to be good.
 
Office Facilities
 
Our head office, which occupies 20,500 square feet, is located at 2 Meridian Road, Toronto, Ontario.  The leased premises include approximately 8,000 square feet of laboratory and research space.  We believe that our existing facilities are adequate to meet our requirements for the near term.  Our current lease expires on March 31, 2011.
 
Competition
 
The biotechnology and pharmaceutical industries are characterized by rapidly evolving technology and intense competition. There are numerous players in both of these industries that are focusing their efforts on activities similar to ours. Some of these are companies with established positions in the pharmaceutical industry and may have substantially more financial and technical resources, more extensive research and development capabilities, and greater marketing, distribution, production and human resources than us. In addition, we may face competition from other companies for opportunities to enter into partnerships with biotechnology and pharmaceutical companies and academic institutions. Many of these other companies however are not solely focused on cancer, as is the mission of our drug development strategy to specialize in the development of drugs for the treatment and management of cancer.
 
Competition with our products may include chemotherapeutic agents, monoclonal antibodies, antisense therapies, small molecules, biologics and immunotherapies with novel mechanisms of action. These are drugs that are delivered by specific means for treatment of cancer patients, with a potential to be used in non-cancer indications. We also expect that we may experience competition from established and emerging pharmaceutical and biotechnology companies that have other forms of treatment for the cancers that we target. There are many drugs currently in development for the treatment of cancer that employ a number of novel approaches for attacking these cancer targets. Cancer is a complex disease with more than 100 indications requiring drugs for treatment. The drugs in competition with our drugs have specific targets for attacking the disease, targets which are not necessarily the same as ours. These competitive drugs therefore could potentially also be used together in combination therapies with our drugs to manage the disease.
 
Government Regulation
 
Overview
 
Regulation by government authorities in Canada, the United States, and the European Union is a significant factor in our current research and drug development activities.  To clinically test, manufacture and market drug products for therapeutic use, we must satisfy the rigorous mandatory procedures and standards established by the regulatory agencies in the countries in which we currently operate or intend to operate.
 
The laws of most of these countries require the licensing of manufacturing facilities, carefully controlled research and the extensive testing of products.  Biotechnology companies must establish the safety and efficacy of their new products in clinical trials, they must establish current Good Manufacturing Practices or current Good Manufacturing Practice and control over marketing activities before being allowed to market their products.  The safety and efficacy of a new drug must be shown through clinical trials of the drug carried out in accordance with the mandatory procedures and standards established by regulatory agencies.
 
The process of completing clinical trials and obtaining regulatory approval for a new drug takes a number of years and requires the expenditure of substantial resources.  Once a new drug or product license application is submitted, we cannot assure you that a regulatory agency will review and approve the application in a timely manner.  Even after initial approval has been obtained, further studies, including post-marketing studies, may be required to provide additional data on efficacy and safety necessary to confirm the approved indication or to gain approval for the use of the new drug as a treatment for clinical indications other than those for which the new drug was initially tested.  Also, regulatory agencies require post-marketing surveillance programs to monitor a new drug’s side effects.  Results of post-marketing programs may limit or expand the further marketing of new drugs.  A serious safety or effectiveness problem involving an approved new drug may result in a regulatory agency requiring withdrawal of the new drug from the market and possible civil action.  We cannot assure you that we will not encounter such difficulties or excessive costs in our efforts to secure necessary approvals, which could delay or prevent us from manufacturing or marketing our products.
 

 
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In addition to the regulatory product approval framework, biotechnology companies, including Lorus, are subject to regulation under local provincial, state and federal law, including requirements regarding occupational safety, laboratory practices, environmental protection and hazardous substance control, and may be subject to other present and future local, provincial, state, federal and foreign regulation, including possible future regulation of the biotechnology industry.
 
Regulation in Canada
 
In Canada, the manufacture and sale of new drugs are controlled by Health Canada.  New drugs must pass through a number of testing stages, including pre-clinical testing and clinical trials.  Pre-clinical testing involves testing the new drug’s chemistry, pharmacology and toxicology in vitro and in vivo.  Successful results (that is, potentially valuable pharmacological activity combined with an acceptable low level of toxicity) enable the developer of the new drug to file a clinical trial application to begin clinical trials involving humans.
 
To study a drug in Canadian patients, a clinical trial application submission must be filed with Health Canada.  The clinical trial application submission must contain specified information, including the results of the pre-clinical tests completed at the time of the submission and any available information regarding use of the drug in humans.  In addition, since the method of manufacture may affect the efficacy and safety of a new drug, information on manufacturing methods and standards and the stability of the drug substance and dosage form must be presented.  Production methods and quality control procedures must be in place to ensure an acceptably pure product, essentially free of contamination, and to ensure uniformity with respect to all quality aspects.
 
Provided Health Canada does not reject a clinical trial application submission, clinical trials can begin.  Clinical trials for product candidates to treat cancer are generally carried out in three phases.  Phase I involves studies to evaluate toxicity and ideal dose levels in humans.  The new drug is administered to human patients who have met the clinical trial entry criteria to determine pharmacokinetics, human tolerance and prevalence of adverse side effects.  Phases II and III involve therapeutic studies.  In Phase II, efficacy, dosage, side effects and safety are established in a small number of patients who have the disease or disorder that the new drug is intended to treat.  In Phase III, there are controlled clinical trials in which the new drug is administered to a large number of patients who are likely to receive benefit from the new drug.  In Phase III, the effectiveness of the new drug is compared to that of standard accepted methods of treatment in order to provide sufficient data for the statistical proof of safety and efficacy for the new drug.
 
If clinical studies establish that a new drug has value, the manufacturer submits a new drug submission application to Health Canada for marketing approval.  The new drug submission contains all information known about the new drug, including the results of pre-clinical testing and clinical trials.  Information about a substance contained in an new drug submission includes its proper name, its chemical name, and details on its method of manufacturing and purification, and its biological, pharmacological and toxicological properties.  The new drug submission also provides information about the dosage form of the new drug, including a quantitative listing of all ingredients used in its formulation, its method of manufacture, manufacturing facility information, packaging and labelling, the results of stability tests, and its diagnostic or therapeutic claims and side effects, as well as details of the clinical trials to support the safety and efficacy of the new drug.  Furthermore, for biological products, an on-site evaluation is completed to assess the production process and manufacturing facility. It is required prior to the issuance of a notice of compliance.  All aspects of the new drug submission are critically reviewed by Health Canada. If a new drug submission is found satisfactory, a notice of compliance is issued permitting the new drug to be sold.  In Canada an Establishment license must be obtained prior to marketing the product.
 
Health Canada has a policy of priority evaluation of new drug submissions for all drugs intended for serious or life-threatening diseases for which no drug product has received regulatory approval in Canada and for which there is reasonable scientific evidence to indicate that the proposed new drug is safe and may provide effective treatment.
 

 
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The monitoring of a new drug does not cease once it is on the market.  For example, a manufacturer of a new drug must report any new information received concerning serious side effects, as well as the failure of the new drug to produce desired effects.  As well, if Health Canada determines it to be in the interest of public health, a notice of compliance for a new drug may be suspended and the new drug may be removed from the market.
 
A post surveillance program involves clinical trials conducted after a drug is marketed (referred to as phase 4 studies in the United States) and is an important source of information on as yet undetected adverse outcomes, especially in populations that may not have been involved in the premarketing trials (e.g., children, the elderly, pregnant women) and the drug’s long-term morbidity and mortality profile. Regulatory authorities may require companies to conduct Phase 4 studies as a condition of market approval. Companies often conduct post-marketing studies in the absence of a regulatory mandate.
 
An exception to the foregoing requirements relating to the manufacture and sale of a new drug is the limited authorization that may be available in respect of the sale of new drugs for emergency treatment.  Under the special access program, Health Canada may authorize the sale of a quantity of a new drug for human use to a specific practitioner for the emergency treatment of a patient under the practitioner’s care.  Prior to authorization, the practitioner must supply Health Canada with information concerning the medical emergency for which the new drug is required, such data as is in the possession of the practitioner with respect to the use, safety and efficacy of the new drug, the names of the institutions at which the new drug is to be used and such other information as may be requested by Health Canada.  In addition, the practitioner must agree to report to both the drug manufacturer and Health Canada the results of the new drug’s use in the medical emergency, including information concerning adverse reactions, and must account to Health Canada for all quantities of the new drug made available.
 
The Canadian regulatory approval requirements for new drugs outlined above are similar to those of other major pharmaceutical markets.  While the testing carried out in Canada is often acceptable for the purposes of regulatory submissions in other countries, individual regulatory authorities may request supplementary testing during their assessment of any submission. We cannot assure you that the clinical testing conducted under Health Canada authorization or the approval of regulatory authorities of other countries will be accepted by regulatory authorities outside Canada or such other countries.
 
Regulation in the United States
 
In the United States, the Food & Drug Administration (“FDA”) controls the manufacture and sale of new drugs.  New drugs require FDA approval of a New Drug Application prior to commercial sale.  In the case of a biological product, a biological license application must be obtained prior to marketing and batch releasing. To obtain marketing approval, data from adequate and well-controlled clinical investigations, demonstrating to the FDA’s satisfaction a new drug’s safety and effectiveness for its intended use, are required.  Such data are generated in studies conducted pursuant to an IND submission, similar to that required for a clinical trial application in Canada.  As in Canada, clinical studies are characterized as Phase I, Phase II and Phase III trials or a combination thereof.  In a marketing application, the manufacturer must also demonstrate the identity, potency, quality and purity of the active ingredients of the new drug involved, and the stability of those ingredients.  Further, the manufacturing facilities, equipment, processes and quality controls for the new drug must comply with the FDA’s current Good Manufacturing Practice regulations for drugs or biological products both in a pre-licensing inspection before product licensing and in subsequent periodic inspections after licensing.   An establishment license grants the sponsor permission to fabricate, package, label, distribute, import, wholesale or test of the newly approved drug. A five-year period of market exclusivity for a drug comprising a new chemical entity is available to an applicant that succeeds in obtaining FDA approval of a new chemical entity, provided the active ingredient of the new chemical entity has never before been approved in an New Drug Application. During this exclusivity period, the FDA may not approve any abbreviated application filed by another sponsor for a generic version of the new chemical entity. To extend this market protection, especially important when the original patent may be close to expiration, new indications or dosage forms of previously approved drugs can receive new use or new clinical study exclusivity- up to a three-year period of market exclusivity. During this time, the FDA may not approve an abbreviated application filed by another sponsor for a generic version of the product for that use or indication. For orphan drugs or biologics, a seven-year period exclusivity is granted to benefit the marketing of a drug, which treats rare diseases or conditions with less than 200,000 patients.
 

 
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The FDA has “fast track” regulations intended to accelerate the approval process for the development, evaluation and marketing of new drugs used to diagnose or treat life-threatening and severely debilitating illnesses for which no satisfactory alternative therapies exist.  “Fast track” designation affords early interaction with the FDA in terms of protocol design and eligibility for expedited review of an New Drug Application.  It also permits, although it does not require, the FDA to issue marketing approval based on a surrogate endpoint (a measurement intended to substitute for the clinical measurement of interest, usually prolongation of survival) although the FDA will often require subsequent clinical trials or even post-approval efficacy studies).
 
The above describes briefly what is necessary for a new drug to be approved for marketing in North America. The European Medicines Agency and Japanese Pharmaceuticals and Medical Devices Agency are also important regulatory authorities in drug development. Together with the FDA, they are the three International Conference on Harmonization parties which oversee the three largest markets for drug sales.
 
C.           Organizational Structure
 
Old Lorus was incorporated under the Business Corporations Act (Ontario) on September 5, 1986 under the name RML Medical Laboratories Inc.  On October 28, 1991, RML Medical Laboratories Inc. amalgamated with Mint Gold Resources Ltd., resulting in Old Lorus becoming a reporting issuer (as defined under Canadian securities law) in Ontario, on such date.  On August 25, 1992, Old Lorus changed its name to IMUTEC Corporation.  On November 27, 1996, Old Lorus changed its name to Imutec Pharma Inc., and on November 19, 1998, Old Lorus changed its name to Lorus Therapeutics Inc.  On October 1, 2005, Old Lorus continued under the Canada Business Corporations Act.  On July 10, 2007, the Old Lorus changed its name from Lorus Therapeutics Inc. to 4325231 Canada Inc. and on October 17, 2007 changed its name to Global Summit Real Estate Inc.  As of the Arrangement Date, Old Lorus is not related to New Lorus.
 
New Lorus was incorporated on November 1, 2006 as 6650309 Canada Inc. under the Canada Business Corporations Act.
 
On the Arrangement Date, Old Lorus completed a plan of arrangement and corporate reorganization with, among others, 6650309 Canada Inc., subsequently renamed Lorus Therapeutics Inc. (“New Lorus”), 6707157 Canada Inc. and Pinnacle International Lands, Inc.  As a result of the plan of arrangement and reorganization, among other things, each common share of Old Lorus was exchanged for one common share of New Lorus and the assets (excluding certain future tax attributes and related valuation allowance) and liabilities of Old Lorus (including all of the shares of its subsidiaries held by it) were transferred, directly or indirectly, to the Company and/or its subsidiaries.  New Lorus continued the business of Old Lorus after the Arrangement Date with the same officers and employees and continued to be governed by the same directors as Old Lorus prior to the Arrangement Date.   At the Arrangement Date, New Lorus’ articles of incorporation were amended to change the name of the Company from 6650309 Canada Inc. to Lorus Therapeutics Inc.
 
The address of the Company’s head and registered office is 2 Meridian Road, Toronto, Ontario, Canada, M9W 4Z7.  Our corporate website is www.lorusthera.com.  The contents of the website are specifically not included in this Form 20-F by reference.
 
Our common shares are listed on the TSX under the symbol “LOR” and on the OTCBB under the symbol “LRUSF”.
 
Lorus’ subsidiary is NuChem Pharmaceuticals Inc., a corporation incorporated under the laws of Ontario, of which Lorus owns 80% of the issued and outstanding voting share capital and 100% of the issued and outstanding non-voting preference share capital. On May 31, 2009, GeneSense Technologies Inc., of which Lorus owned 100% of the issued and outstanding share capital was wound up into Lorus and subsequently dissolved. Until June 22, 2009 Lorus owned 100% of the issued and outstanding share capital of Pharma Immune Inc., a corporation incorporated under the laws of Delaware, at which time it disposed of these shares (See “The Company - Secured Convertible Debentures”).
 

 
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D.           Property, Plant and Equipment
 
Our head office, which occupies 20,500 square feet, is located at 2 Meridian Road, Toronto, Ontario.  The leased premises include approximately 8,000 square feet of laboratory and research space.  We believe that our existing facilities are adequate to meet our requirements for the near term.  Our current lease expires on March 31, 2011.
 
Item 4A.                 Unresolved Staff Comments
 
Not applicable.
 
Item 5.                 Operating and Financial Review and Prospects
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
A.           Operating Results
 
The following discussion should be read in conjunction with the audited financial statements of the Company for the year ended May 31, 2010 and the accompanying notes (the “Financial Statements”) set forth elsewhere in this report. The Financial Statements, and all financial information discussed below, have been prepared in accordance with Canadian GAAP. Significant differences between Canadian GAAP and U.S. GAAP are identified in the Supplementary Information included with the Financial Statements included in this Annual Report. All amounts are expressed in Canadian dollars unless otherwise noted. In this Management’s Discussion and Analysis, “Lorus”, the “Company”, “we”, “us” and “our” each refers to Lorus Therapeutics Inc. both before and after the Arrangement Date.
 
Overview
 
Lorus is a life sciences company focused on the discovery, research and development of effective anticancer therapies with a high safety profile.  Lorus has worked to establish a diverse anticancer product pipeline, with products in various stages of development ranging from pre-clinical to an advanced Phase II clinical trial.  A growing intellectual property portfolio supports our diverse product pipeline.  Lorus’ pipeline is a combination of internally developed products and products licensed in from other entities at a pre-clinical stage.
 
We believe that the future of cancer treatment and management lies in drugs that are effective, safe and have minimal side effects, and therefore improve a patient’s quality of life.  Many of the cancer drugs currently approved for the treatment and management of cancer are toxic with severe side effects, and we therefore believe that a product development plan based on effective and safe drugs could have broad applications in cancer treatment.  Lorus’ strategy is to continue the development of our product pipeline using several therapeutic approaches. Each therapeutic approach is dependent on different technologies, which we believe mitigates the development risks associated with a single technology platform.  We evaluate the merits of each product throughout the clinical trial process and consider commercial viability as appropriate.  The most advanced anticancer drugs in our pipeline, each of which flow from different platform technologies, are antisense, small molecules and immunotherapeutics.
 
Our business model is to take our product candidates through pre-clinical testing and into Phase I and Phase II clinical trials.  It is our intention to then partner or co-develop these product candidates after successful completion of Phase I or II clinical trials.  Lorus will give careful consideration in the selection of partners that can best advance the drug candidates into a pivotal Phase III clinical trial and, upon successful results, commercialization.  Our objective is to receive cash for milestone payments and royalties from such partnerships which will support continued development of our product pipeline.  We assess each product candidate and determine the optimal time to work towards partnering out that product candidate.
 

 
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Our success is dependent upon several factors, including, maintaining sufficient levels of funding through public and/or private financing, establishing the efficacy and safety of our products in clinical trials and securing strategic partnerships.
 
Our loss from operations for the year ended May 31, 2010 decreased to $5.7 million ($0.61 per share) compared to $9.3 million ($1.13 per share) during the same period in fiscal 2009. The current year net earnings and other comprehensive earnings of $5.3 million (earnings of $0.57 per share) are a result of the $11.0 million gain recognized on the extinguishment of our convertible debentures in June 2009 (described below in the section titled “Gain on repurchase of convertible debentures and transfer of assets”) as well as the gain on sale of shares related to the Arrangement (as described in the section titled “Gain on sale of share”) of $50 thousand due to a reduction in the indemnification liability (described below). For the year ended May 31, 2009 the Company recorded a gain on sale of shares of $450 thousand resulting in a net loss and other comprehensive loss for the period of $8.9 million ($1.08 per share). During the year ended May 31, 2008, the Company realized a gain on the sale of shares related to the Arrangement in the amount of $6.3 million resulting in net loss and other comprehensive loss for the period of $6.3 million ($0.87 per share).
 
The decrease in net loss from operations for the year ended May 31, 2010 compared with the prior year is due primarily to lower research and development costs of $1.2 million resulting from less spending on GLP-toxicity studies as well as an overall reduction in company spending to conserve cash balances, as well as reduced interest and accretion charges of $653 thousand and $1.6 million respectively, resulting from the settlement of the convertible debentures described below and lower stock based compensation costs of $270 thousand as a result of a lower share price in the current year. These reductions were offset by a decrease in interest income from $270 thousand for the year ended May 31, 2009 to $21 thousand for the year ended May 31, 2010 as a result of lower cash and investment balances.
 
We utilized cash of $3.7 million in our operating activities in the year ended May 31, 2010 compared with $7.2 million in the prior year. The decrease is primarily a result of a reduced loss from operations and increased accounts payable and accrued liabilities balances in the current year.
 
At May 31, 2010, we had cash and cash equivalents and short-term investments of $914 thousand compared to $5.9 million at May 31, 2009.
 
As a result of the Company’s current cash position, management is currently undertaking actions to reduce expenditures while at the same time pursuing investment and other opportunities aimed at funding its research and development programs.  As part of its cost reduction strategies, management expects to reduce its research and development costs by limiting activities and reduce its general and administrative costs by limiting expenditures and reducing its labour costs, among other things, until such time as the Company has sufficient capital to support a full development program.
 

 
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Selected Annual Financial Data
 
The following selected consolidated financial data has been derived from, and should be read in conjunction with, the accompanying audited Financial Statements for the year ended May 31, 2010 which are prepared in accordance with Canadian GAAP.
 
Consolidated Statements of Loss and Deficit(1)
 
(amounts in Canadian 000’s except for per common share data)
 
Years Ended May 31
 
   
2010
   
2009
   
2008
 
REVENUE
  $ 131     $ 184     $ 43  
                         
EXPENSES
                       
Cost of sales
    -       -       2  
Research and development
    2,517       3,757       6,260  
General and administrative
    2,964       2,958       3,715  
Stock-based compensation
    176       446       719  
Depreciation and amortization
    86       189       317  
Operating expenses
    5,743       7,350       11,013  
Interest expense on convertible debentures
    54       707       1,029  
Accretion in carrying value of secured convertible debentures
    80       1,707       1,176  
Amortization of deferred financing charges
    -       -       -  
Interest income
    (21 )     (270 )     (542 )
Loss from operations for the period
    (5,725 )     (9,310 )     (12,633 )
Gain on sale of shares
    50       450       6,299  
Net earnings (loss) and other comprehensive income
    5,331       (8,860 )     (6,334 )
Basic and diluted earnings (loss) per common share
  $ 0.57     $ (1.08 )   $ (0.87 )
Weighted average number of common shares outstanding used in the calculation of
                       
       basic earnings (loss) per share
    9,364       8,236       7,169  
       diluted earnings (loss) per share(2)
    9,379       8,236       7,169  
Total Assets
  $ 2,303     $ 7,527     $ 11,607  
Total Long-term liabilities
  $ -     $ -     $ 12,742  
 
(1)
On July 10, 2007, the Company completed the Arrangement.  As a result of the Arrangement, each common share of Old Lorus was exchanged for one common share of the Company and the assets (excluding certain future tax assets and related valuation allowance) and liabilities of Old Lorus were transferred to the Company and/or its subsidiaries.  The Company continued the business of Old Lorus after the Arrangement Date with the same officers and employees and continued to be governed by the same directors as Old Lorus prior to the Arrangement Date. Therefore, the Company’s operations have been accounted for on a continuity of interest basis and accordingly, the consolidated financial statement information above reflect that of the Company as if it had always carried on the business formerly carried on by Old Lorus.
 

 
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(2)
In accordance the authority granted by shareholders at the Company’s annual and special meeting on November 30, 2009 to permit it to implement a consolidation of the Company’s outstanding common shares in a ratio of between 1-for-10 and 1-for-50 at any time prior to November 30, 2010, the Company’s Board of Directors approved a 1-for-30 share consolidation which became effective May 25, 2010. The share consolidation affects all of the Company’s common shares, stock options and warrants outstanding at the effective time. Prior to consolidation the Company had approximately 298 million shares outstanding. Following the share consolidation, the Company had approximately 9.9 million common shares outstanding. Similarly, prior to consolidation, the Company had approximately 20.2 million stock options and 36.9 million warrants to purchase common shares outstanding. Following the share consolidation, the Company had approximately 673 thousand stock options and 1.3 million warrants to purchase common shares outstanding. All references to number of shares, stock options and warrants in the current and past periods have been adjusted to reflect the impact of the consolidation. All amounts based on the number of shares, stock options or warrants, unless otherwise specified, such as earnings (loss) per share and weighted average issuance price in the case of stock options have been adjusted to reflect the impact of 1-for-30 share consolidation.
 
Recent Accounting Pronouncements Adopted -Canadian GAAP
 
The following accounting policies were adopted during the year ended May 31, 2010.

Goodwill and Intangible Assets:
 
Effective June 1, 2009, the Company adopted The Canadian Institute of Chartered Accountants’ Handbook Section 3064, Goodwill and Intangible Assets, which replaced Handbook Section 3062, Goodwill and Other Intangible Assets, and Section 3450, Research and Development Costs and establishes the standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The adoption of this new standard did not have an impact on the Company’s consolidated financial statements.
 
Financial instruments:
 
Effective June 1, 2009, the Company adopted the amendments under Handbook Section 3862, Financial Instruments - Disclosures, to include additional disclosure requirements about fair value measurement for financial instruments and liquidity risk disclosures. These amendments require a three level hierarchy that reflects the significance of the inputs used in making the fair value measurements. Fair value of assets and liabilities included in Level 1 are determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabilities in Level 2 include valuations using inputs other than the quoted prices for which all significant inputs are based on observable market data, either directly or indirectly. Level 3 valuations are based on inputs that are not based on observable market data. The adoption of the new standard did not have a material impact on the consolidated financial statements.
 
The following accounting policies were adopted during the year ended May 31, 2009.
 
Credit risk and fair value of financial assets and financial liabilities:
 
Effective January 1, 2009, the Company adopted Emerging Issue Committee Abstract 173, Credit Risk and the Fair Value of Financial Assets and Financial Liabilities. Emerging Issue Committee Abstract 173 requires the Company to take into account the Company’s own credit risk and the credit risk of the counterparty in determining the fair value of financial assets and financial liabilities, including derivative instruments. The adoption of the new standard did not have a material impact on the consolidated financial statements.
 
 

 
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Capital disclosures:
 
Effective June 1, 2008, the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants Handbook Section 1535, Capital Disclosures. Section 1535 establishes standards for disclosing information about an entity’s capital and how it is managed. It requires the disclosure of information about: (i) an entity’s objectives, policies and processes for managing capital; (ii) an entity’s compliance with any capital requirements; and (iii) if it has not complied, the consequences of such non-compliance. The Company has included disclosures recommended by Section 1535 in note 8 of the financial statements included in Item 18 of this Annual Report.
 
Financial instruments:
 
Effective June 1, 2008, the Company adopted the new recommendations of Canadian Institute of Chartered Accountants Handbook Section 3862, Financial Instruments - Disclosures and Handbook Section 3863, Financial Instruments - Presentation. Section 3862 requires entities to provide disclosures in their financial statements that enable users to evaluate the significance of financial instruments on the entity’s financial position and its performance and the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and how the entity manages those risks. Section 3863 establishes standards for presentation of financial instruments and non-financial derivatives. It deals with the classification of financial instruments, from the perspective of the issuer, between liabilities and equities, the classification of related interest, dividends, losses and gains, and circumstances in which financial assets and financial liabilities are offset. The adoption of these standards did not have any impact on the classification and valuation of the Company’s financial instruments. The Company has included disclosures recommended by these new Handbook Sections in note 9 of the financial statements included in Item 18 of this Annual Report.
 
General standards of financial statement presentation:
 
In May 2007, the Accounting Standards Board amended Canadian Institute of Chartered Accountants Handbook Section 1400 “General Standards of Financial Statement Presentation”, to change the guidance related to management’s responsibility to assess the ability of the entity to continue as a going concern.
 
The main features of the changes are as follows:
 
 
i.
management is required to make an assessment of an entity’s ability to continue as a going concern;
 
 
ii.
in making its assessment, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the balance sheet date;
 
 
iii.
financial statements must be prepared on a going concern basis unless management either intends to liquidate the entity, to cease trading or cease operations, or has no realistic alternative but to do so;
 
 
iv.
disclosure is required of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern; and
 
 
v.
when financial statements are not prepared on a going concern basis, that fact should be disclosed, together with the basis on which the financial statements are prepared and the reason the entity is not regarded as a going concern.
 
The effective date of these amendments is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2008, specifically June 1, 2008 for the Company. The new disclosure requirements pertaining to this Section are contained in note 1 of the financial statements included in Item 18 of this Annual Report.
 
The following accounting policies were adopted during the year ended May 31, 2008.
 

 
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Financial instruments - disclosure and presentation
 
Effective June 1, 2007, the Company adopted the recommendations of the Canadian Institute of Chartered Accountants Handbook Section 1530, Comprehensive Income; Section 3855, Financial Instruments - Recognition and Measurement, retroactively without restatement of prior periods. These sections provide standards for recognition, measurement, disclosure and presentation of financial assets, financial liabilities and non-financial derivatives. Section 1530 provides standards for the reporting and presentation of comprehensive income, which represents the change in equity, from transactions and other events and circumstances from non-owner sources.  Other comprehensive income refers to items recognized in comprehensive income that are excluded from net income calculated in accordance with Canadian GAAP.  As a result of adopting the above standards, the Company did not recognize any other comprehensive income in its financial statements.
 
Upon adoption of the new standards on June 1, 2007, the Company designated its financial assets and liabilities as follows:
 
Cash and cash equivalents:
 
Cash and cash equivalents as at June 1, 2007 and acquired thereafter are classified as held-for-trading investments and measured at fair value.  By virtue of the nature of these assets, fair value is generally equal to cost plus accrued interest.  Where applicable, any significant change in market value would result in a gain or loss being recognized in the consolidated statements of operations.  As a result of adopting the new standards, there was no material change in valuation of these assets.
 
Short-term investments, marketable securities and other investments:
 
Short-term investments consist of fixed income government investments and corporate instruments.  Any government and corporate investments with a stated maturity date that are not cash equivalents are classified as held-to-maturity investments, except where the Company does not intend to hold to maturity and, therefore, the investment is designated as held-for-trading.  Held-to-maturity investments are measured at amortized cost using the effective interest rate method, while held-for-trading investments are measured at fair value and the resulting gain or loss is recognized in the consolidated statements of operations.  The Company designated certain corporate instruments with maturities greater than one year previously carried at amortized cost as held-for-trading investments.  This change in accounting policy resulted in a decrease in the carrying amount of $27 thousand and an increase in the opening deficit accumulated during the development stage of $27 thousand.  The Company recognized a net unrealized gain in the consolidated statements of operations for the year ended May 31, 2010 of $8 thousand (2009 - $10 thousand, 2008 - $7 thousand).
 
Accounts payable and accrued liabilities:
 
Accounts payable and accrued liabilities are typically short-term in nature and classified as other financial liabilities.  These liabilities are carried at amortized cost.  As a result of adopting the new standards, there is no material change in the carrying value of these liabilities.
 
Secured convertible debentures:
 
The secured convertible debentures are classified as other financial liabilities and accounted for at amortized cost using the effective interest method, which is consistent with the Company’s accounting policy prior to the adoption of Section 3855.  The deferred financing charges related to the secured convertible debentures, formerly included in long-term assets, are now included as part of the carrying value of the secured convertible debentures and continue to be amortized using the effective interest method.
 
Embedded derivatives:
 
Section 3855 requires that the Company identify embedded derivatives that require separation from the related host contract and measure those embedded derivatives at fair value.  Subsequent change in fair value of embedded derivatives is recognized in the consolidated statements of operations in the period in which the change occurs.
 

 
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The Company did not identify any embedded derivatives that required separation from the related host contract and measured at fair value as at June 1, 2007.
 
Transaction costs:
 
Transaction costs that are directly attributable to the acquisition or issuance of financial assets or liabilities are accounted for as part of the respective asset or liability’s carrying value at inception except for held-for-trading securities where the costs are expensed immediately.
 
Recent Accounting Pronouncements Adopted - U.S. GAAP
 
In February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”), which is primarily codified in ASC Topic 820 and delays the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the Company’s fiscal 2010 year.  The adoption of this standard, when applied to non-financial assets and non-financial liabilities, did not have a material impact on the results of operations or financial position.
 
In December 2007, the FASB issued Statement No. 141R, which is primarily codified in ASC Topic 805,and requires most identifiable assets, liabilities, non-controlling interests and goodwill acquired in a business combination to be recorded at full fair value.  ASC Topic 805 applies to all business combinations, including combinations among mutual entities and combinations by contract alone.  Under ASC Topic 805, all business combinations will be accounted for by applying the acquisition method.  ASC Topic 805 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, specifically June 1, 2009 for the Company. As the Company did not enter into any business combination transactions on or after June 1, 2009, the adoption of this standard did not have any impact on the consolidated interim financial statements.
 
In December 2007, the FASB issued Statement No. 160, which is primarily codified in ASC Subtopic 810-10,  and requires non-controlling interests (previously referred to as minority interests) to be treated as a separate component of equity, not as a liability or other item outside permanent equity.  ASC Subtopic 810-10 applies to the accounting for non-controlling interests and transactions with non-controlling interest holders in consolidated financial statements.  ASC Subtopic 810-10  is effective for annual periods beginning on or after December 15, 2008, specifically June 1, 2009 for the Company.  The adoption of this standard did not have an impact on the results of operations or financial position.
 
In December 2007, the FASB ratified EITF No. 07-1, Accounting for Collaborative Agreements ("EITF 07-1"), which is primarily codified in ASC Topic 808 and provides guidance on how the parties to a collaborative agreement should account for costs incurred and revenue generated on sales to third parties, how sharing payments pursuant to a collaboration agreement should be presented in the income statement and certain related disclosure requirements.  ASC Topic 808 is effective for the first annual or interim reporting period beginning after December 15, 2008, specifically June 1, 2009 for the Company and should be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. The adoption of this standard did not have an impact on the results of operations or financial position.
 
On June 1, 2008, the Company adopted ASC Subtopic 820-10 “Fair Value Measurements” formerly FASB Statement No. 157, which defines fair value, establishes a framework for measuring fair value under United States GAAP, and expands disclosures about fair value measurements. ASC Subtopic 820-10 applies to other accounting pronouncements that require or permit fair value measurements.
 
ASC Subtopic 820-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability. The adoption of this standard did not have an impact on the results of operations or financial position other than the additional disclosures as shown below.

 
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 (i)      Fair value hierarchy:
 
ASC Subtopic 820-10 requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  ASC Subtopic 820-10 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value.  A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  ASC Subtopic 820-10 prioritizes the inputs into three levels that may be used to measure fair value:
 
 
Ÿ
Level 1 - applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
 
Ÿ
Level 2 - applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
 
Ÿ
Level 3 - applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

Critical Accounting Policies
 
The Company periodically reviews its financial reporting and disclosure practices and accounting policies to ensure that they provide accurate and transparent information relative to the current economic and business environment. As part of this process, the Company has reviewed its selection, application and communication of critical accounting policies and financial disclosures. Management has discussed the development and selection of the critical accounting policies with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the disclosure relating to critical accounting policies in this Annual Report. Other important accounting polices are described in note 3 of the Financial Statements included in Item18 of this Annual Report.
 
Drug Development Costs
 
We incur costs related to the research and development of pharmaceutical products and technologies for the management of cancer. These costs include internal and external costs for preclinical research and clinical trials, drug costs, regulatory compliance costs and patent application costs. All research costs are expensed as incurred as required under Canadian GAAP.
 
Development costs, including the cost of drugs for use in clinical trials, are expensed as incurred unless they meet the criteria under Canadian GAAP for deferral and amortization. The Company continually assesses its activities to determine when, if ever, development costs may qualify for capitalization. By expensing the research and development costs as required under Canadian GAAP, the value of the product portfolio is not reflected on the Company’s Financial Statements.
 
Stock-Based Compensation
 
We have applied the fair value based method to expense stock options awarded since June 1, 2002 using the Black-Scholes option-pricing model as allowed under Canadian Institute of Chartered Accountants Handbook Section 3870. The model estimates the fair value of fully transferable options, without vesting restrictions, which significantly differs from the stock option awards issued by Lorus. The model also requires four highly subjective assumptions including future stock price volatility and expected time until exercise, which greatly affect the calculated values. The increase or decrease of one of these assumptions could materially increase or decrease the fair value of stock options issued and the associated expense.

 
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Valuation Allowance for Future Tax Assets
 
We have a net tax benefit resulting from non-capital losses carried forward, and scientific research and experimental development expenditures. In light of the continued net losses and uncertainty regarding our future ability to generate taxable income, management is of the opinion that it is not more likely than not that these tax assets will be realized in the foreseeable future and hence, a full valuation allowance has been recorded against these income tax assets. Consequently, no future income tax assets or liabilities are recorded on the balance sheets.
 
The generation of future taxable income could result in the recognition of some portion or all of the remaining benefits, which could result in an improvement in our results of operations through the recovery of future income taxes.
 
Valuation of Long Lived Assets
 
We periodically review the useful lives and the carrying values of our long-lived assets. We review for impairment in long-lived assets whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the sum of the undiscounted future cash flows expected to result from the use and eventual disposition of an asset is less than its carrying amount, it is considered to be impaired. An impairment loss is measured at the amount by which the carrying amount of the asset exceeds its fair value; which is estimated as the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the asset.
 
To date management believes that there have been no material changes to the assumptions used in the preparation of these financial statements that would materially affect the valuations of the above.  The Company continues to actively use its long lived assets.
 
Recent Accounting Pronouncements Yet To Be Adopted - Canadian GAAP
 
The following Recent Accounting Pronouncements under Canadian GAAP have yet to be adopted:
 
International Financial Reporting Standards (IFRS)
 
The Canadian Accounting Standards Board requires all Canadian publicly accountable entities to adopt International Financial Reporting Standards (“IFRS”) for years beginning on or after January 1, 2011. The Company’s first annual filing under IFRS will be for the year ended May 31, 2012; its first quarterly filing under IFRS will be for the quarter ending August 31, 2011 and will include IFRS comparative figures for the period ended August 31, 2010. Accordingly, the Company’s adoption date for IFRS is June 1, 2011, but its transition date (“Transition Date”) is June 1, 2010 in order to present IFRS comparative figures in the Company’s 2011 consolidated financial statements.
 
IFRS uses a conceptual framework similar to Canadian GAAP, however, there are significant differences in recognition, measurement and disclosure. Given the nature of Lorus’ business and the make-up of its current balance sheets, IFRS could have an impact on its reported financial statements. The Company’s implementation of IFRS will require the Company to make and disclose certain policy choices and increase the amount of disclosure necessary to fulfill its IFRS reporting obligations.
 
During 2009, a detailed project plan with expected milestones was established and approved by senior management of the Company. There are three phases to the plan: a diagnostic phase, a solution development phase and an implementation phase. The plan involves an assessment of the impact of the move to IFRS on accounting and reporting (including any Impact on the Company’s internal controls over financial reporting, disclosure controls and procedures, IT systems and processes, and the business implications of this conversion). The Company has allocated resources and included in its project plan training required for both the conversion team and all impacted employees of the organization.
 
The Company has substantially completed the diagnostic phase and has begun the second and third phases of its plan. During 2010, the Company continued to make progress on its established milestones including analyzing its policy selections both on conversion and post conversion as well as evaluating new financial statement disclosure requirements.
 

 
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Moving forward, the Company expects to meet all milestones leading up to the conversion in 2012. In 2011, the Company expects to finalize the elections under IFRS 1, publish new policy choices and quantify the impact of the changes to the consolidated financial statements in preparation for the 2012 conversion.
 
Recent Accounting Pronouncements Yet To Be Adopted - U.S. GAAP
 
The following Recent Accounting Pronouncements under U.S. GAAP have yet to be adopted:
 
In August 2009, the FASB issued the FASB Accounting Standards Update No. 2009-05 “Fair Value Measurement and Disclosures Topic 820 - Measuring Liabilities at Fair Value”, which provides amendments to subtopic 820-10, Fair Value Measurements and Disclosures - Overall, for the fair value measurement of liabilities.  This update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques: 1. A valuation technique that uses: a. The quoted price of the identical liability when traded as an asset b. Quoted prices for similar liabilities or similar liabilities when traded as assets. 2. Another valuation technique that is consistent with the principles of topic 820; two examples would be an income approach, such as a present value technique, or a market approach, such as a technique that is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability. The amendments in this update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The amendments in this update also clarify that both a quoted price in an active market for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements.  The Company does not expect the adoption of this update to have a material impact on its consolidated financial position, results of operations or cash flows.
 
In September 2009, the FASB issued the FASB Accounting Standards Update No. 2009-08 “Earnings Per Share - Amendments to Section 260-10-S99”, which represents technical corrections to topic 260-10-S99, Earnings per share.  The Company does not expect the adoption of this update to have a material impact on its consolidated financial position, results of operations or cash flows.
 
In October 2009, the FASB issued Accounting Standards Update 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This update addressed the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than a combined unit and will be separated in more circumstances than under existing US GAAP. This amendment has eliminated the residual method of allocation And is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company does not expect the provisions of ASU 2009-13 to have a material effect on the financial position, results of operations or cash flows of the Company.
 
Operating Results
 
Revenue
 
For the year-ended May 31, 2010, revenue decreased to $131 thousand from $184 thousand in the same period last year and $43 thousand in 2008. This decrease in revenue in the current year is related to the timing of recognition of milestone payments associated with the license of Virulizin to ZOR Pharmaceuticals. In prior years Lorus received two milestone payments under the license agreement, one upon signing the agreement and a second upon ZOR achieving a financing milestone. The milestone revenue has been recognized over the period of a service contract period whereby Lorus agreed to provide consulting services to ZOR. The milestone revenue was fully recognized by the end of the second quarter of 2010 as the service agreement with ZOR expired in October 2009.
 
The increased revenue in 2009 compared with 2008 is primarily related to the recognition of the milestone revenue from ZOR.
 

 
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Research and Development
 
Research and development expenses totaled $2.5 million in the year ended May 31, 2010 compared to $3.8 million during the prior year and $6.3 million in 2008. The decrease in expenditures of $1.2 million during the current year compared to the same period in the prior year is primarily a result of the cost of toxicity studies for our lead small molecule drug candidate LOR-253 completed in fiscal 2009. No similar costs were incurred in the current year. In addition, we reduced overall, non-critical research and development costs in response to the current cash position.
 
The decrease in spending during the year ended May 31, 2009 compared with the prior year is due to the GLP-toxicity studies for both our LOR-2040 bladder cancer and LOR-253 small molecule programs during the 2008 fiscal year as well as the cost of manufacturing LOR-2040 further increasing the research and development spending costs in 2008. In 2009, we manufactured LOR-253 drug, our lead small molecule, the manufacturing cost of which is significantly less than LOR-2040.
 
Costs incurred during the current period and to date are summarized in note 11 to the Financial Statements.  In respect of future costs to be incurred on the Company’s principal pipeline products:
 
Antisense
 
Antisense drugs are genetic molecules that inhibit the production of disease-causing proteins.  LOR-2040 (formerly GTI-2040) is the Company’s lead antisense drug, and has shown preclinical anticancer activity across a broad range of cancers and is currently in various Phase I/II trials in several solid tumor types, which are sponsored by the NCI. Lorus selected AML as a lead cancer indication for clinical development of LOR-2040.  LOR-2040 has completed a Company-sponsored advanced Phase II clinical trial in combination with high dose Ara-C as salvage therapy in refractory and relapsed AML patients under 60 years of age.  The Company is currently developing the protocol for a Phase III clinical trial to further develop LOR-2040 and actively seeking partnerships to share in the future development.
 
Small Molecule
 
The Company is utilizing its small molecule drug screening technologies and preclinical scientific expertise to identify several groups of novel small molecules that show strong anticancer activity and a high therapeutic index due to low toxicity.  The Company’s proprietary group of novel small molecule compounds, which include lead compounds LOR-253 and LOR-220, have unique structures and modes of action, and are promising candidates for the development of novel anticancer agents with high safety profiles.  The Company is preparing for the initiation of a Phase I clinical trial for the further development of LOR-2040.

Immunotherapy
 
This clinical approach stimulates the body’s natural defences against cancer.  The Company’s immunotherapy product candidate is IL-17E.  The Company also retains economic interests in Virulizin®
 
 In April 2008, the Company announced the signing of an exclusive multinational license agreement with ZOR Pharmaceuticals, LLC to further develop and commercialize Virulizin™ for human therapeutic applications.  In June 2009, as part of the consideration for our repurchase of the secured convertible debentures from The Erin Mills Investment Corporation (“TEMIC”), the Company assigned to TEMIC the rights under the license agreement with ZOR Pharmaceuticals, LLC, sold to TEMIC the intellectual property associated with Virulizin, but retained a perpetual royalty free license for the animal use of Virulizin.  TEMIC is fully responsible for all clinical and regulatory costs associated with commercialization of Virulizin in territories not covered by the ZOR Pharmaceuticals, LLC license agreement.
 
IL-17E is a protein-based therapeutic that the Company is developing as an immunotherapy for cancer treatment currently in the pre-clinical development stage.
 

 
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General and Administrative
 
General and administrative expenses totaled $3.0 million for the year ended May 31, 2010 compared to $3.0 million in the prior year and $3.7 million in 2008. While the general and administrative expenses in the current year were consistent with the prior year, there were significant reductions to personnel, travel, board of directors and general office costs as we work to conserve cash and reduce our burn rate these savings were offset by financing costs of $569 thousand associated with a financing terminated subsequent to year end (described below). The decrease in general and administrative costs for 2009 compared to 2008 is the result of lower personnel, travel, board of directors and general office costs.
 
Stock-Based Compensation
 
Stock-based compensation expense, net of forfeitures, totaled $176 thousand for the year ended May 31, 2010 compared with $446 thousand in the prior year and $719 thousand in 2008. The lower stock based compensation for the year ending May 31, 2010 is due primarily to a lower share price and therefore lower fair value for options granted  in the current year. The decrease in option expense for the year ended May 31, 2009 compared with May 31, 2008 is the result of expense associated with a one-time increase in options granted that vested immediately in order to bring option granting practices in line with industry standards in 2008, no similar transaction occurred in 2009 or 2010. Also in 2008, the Company recorded an expense of $83 thousand relating to the extension of options to directors not standing for re-election at the Company’s annual general meeting and Dr. Wright for options granted in his capacity as President and CEO. A similar extension was made in 2009 for directors not seeking re-election resulting in a $3 thousand additional expense.
 
Depreciation and Amortization
 
Depreciation and amortization expenses decreased to $86 thousand in the year ended May 31, 2010 as compared to $189 thousand in the prior year and $317 thousand in 2008. The decrease in depreciation and amortization expense is the result of reduced capital asset purchases over the past several fiscal years. During 2009, we acquired research and development equipment that provides us with the ability to do certain testing in house that was previously outsourced.
 
Interest Expense
 
Interest expense was $54 thousand compared with $707 thousand for the prior year and $1.0 million in 2008. During the year ended May 31, 2010 $27 thousand interest expense was paid to the debenture holders (prior to June 22, 2010) with $15 thousand in common shares and $12 thousand in cash with the remaining $27 thousand in interest expense accrued on the two $1 million, 10% interest promissory notes (described under ‘transactions with related parties’) advanced during the year. The interest expense in 2009 and 2008 was for non-cash payments related to the interest payable at a rate of prime plus 1% on the $15.0 million convertible debentures which were repurchased in June 2009. The Company benefited from lower interest rates in 2009 as compared to 2008 due to a reduced prime rate of interest. All interest on the debentures (prior to May 31, 2009) was paid in common shares of the Company.
 
Accretion in Carrying Value of Secured Convertible Debentures
 
Accretion in the carrying value of the Company’s secured convertible debentures was $80 thousand in the year ended May 31, 2010 compared with $1.7 million in the prior year and $1.2 million in 2008. The current year amount of $80 thousand relates to the period in the current year during which the convertible debentures were outstanding, June 1, 2009 to June 19, 2009. Accretion charges arise as under GAAP the Company has allocated the proceeds from each tranche of the debentures to the debt and equity instruments issued on a relative fair value basis resulting in the $15.0 million debentures having an initial cumulative carrying value of $9.8 million as of their dates of issuance. Each reporting period, the Company was required to accrete the carrying value of the convertible debentures such that at maturity on October 6, 2009, the carrying value of the debentures would have been the face value of $15.0 million. The increase in expense year ended May 31, 2009 compared with the prior year is due to the increasing principal balance to which the implicit interest is applied in determining the accretion amount.
 

 
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Interest  Income
 
Interest income totalled $21 thousand in the year ended May 31, 2010 compared to $270 thousand in the prior year and $542 thousand in 2008. The decrease in interest income during the current year is due to significantly lower average cash and marketable securities balances throughout the year and lower interest rates available on investments in comparison with the prior years.
 
Loss from operations for the period
 
For the reasons discussed above, our loss from operations for the year ended May 31, 2010 decreased to $5.7 million ($0.61 per share) compared to $9.3 million ($1.13 per share) in the prior year and $12.6 million ($1.74 per share) in 2008. During the current year the Company recognized a $11.0 million gain on the extinguishment of its convertible debentures in June 2009 and a gain of $50 thousand related to a reduction in the indemnification liability. These gains resulted in net earnings and other comprehensive earnings of $5.3 million (earnings $0.57 per share) for the year ended May 31, 2010. During the year ended May 31, 2009 the Company recorded a gain on sale of shares related to the Arrangement of $450 thousand which resulted in a net loss and other comprehensive loss of $8.9 million ($1.08 per share). During the year ended May 31, 2008, the Company realized a gain related to the Arrangement in the amount of $6.3 million resulting in a net loss and other comprehensive loss for the period of $6.3 million ($0.87 per share).
 
Gain on repurchase of convertible debentures and transfer of assets
 
The terms of the secured convertible debentures are described in note 13 to the Company’s annual financial statements for the period ended May 31, 2010. The Company repurchased these debentures, which were originally due on October 6, 2009, on June 19, 2009.
 
Under the agreement, Lorus repurchased all of the convertible debentures from The Erin Mills Investment Corporation for consideration that included a cash payment on close of the transaction of $3.3 million, the assignment of the rights under the license agreement with ZOR Pharmaceuticals Inc, LLC, certain intellectual property associated with Virulizin and all of Lorus’ shares in its wholly owned subsidiary, Pharma Immune Inc., which held an equity interest in ZOR. Under the agreement, Lorus is entitled to 50% of any royalties received under the ZOR license agreement and 50% of the value of any transaction completed in territories not covered by the ZOR license agreement. Lorus also retains a perpetual royalty free license for the animal use of Virulizin. The Erin Mills Investment Corporation will be fully responsible for all clinical and regulatory costs associated with the commercialization of Virulizin in territories not covered by the ZOR license agreement. Lorus will assist The Erin Mills Investment Corporation with certain agreed upon services.
 
For receipt of the intellectual property associated with Virulizin and all of Lorus’ shares in Pharma Immune Inc., The Erin Mills Investment Corporation released all security interest in the assets of Lorus.
 
As a result of the transaction, the Company recognized a gain on the repurchase of the debentures of $11.0 million reflecting the difference between the fair value of the debentures at the repurchase date, net of transaction costs of approximately $221 thousand, and the cash payment amount of $3.3 million. In addition, as a result of extinguishing the debentures in the amount of $3.8 million, the equity portion of the debentures, was transferred to contributed surplus. The gain on repurchase of the debentures does not result in income taxes payable as the Company has sufficient capital loss and non-capital loss carryforwards to shelter these gains. Capital loss and non-capital loss carryforwards, and the associated valuation allowance have been reduced accordingly.
 
Gain on sale of shares
 
As a result of the Arrangement described above, the Company recognized a gain on the sale of the shares of Old Lorus to the investor of approximately $6.3 million for the year ended May 31, 2008 and a gain on sale in 2009 of $450 thousand which represents the $600 thousand released from escrow less $150 thousand accrued as management’s estimate of the fair value of the liability associated with the indemnification described below. This liability was reduced to $100 thousand in the current year resulting in a gain on sale of $50 thousand in the year ended May 31, 2010. The reduction in liability is the result of the passage of time and related reduction in risk associated with claims under the liability. This liability is included on the balance sheet in Accrued Liabilities as at May 31, 2010.
 

 
46

 


 
Under the Arrangement, New Lorus and its subsidiaries have agreed to indemnify Old Lorus and its directors, officers and employees from and against all damages, losses, expenses (including fines and penalties), other third party costs and legal expenses, to which any of them may be subject arising out of any matter occurring (i) prior to, at or after the effective time of the Arrangement and directly or indirectly relating to any of the assets of Old Lorus transferred to New Lorus pursuant to the Arrangement (including losses for income, sales, excise and other taxes arising in connection with the transfer of any such asset) or conduct of the business prior to the effective time of the Arrangement; (ii) prior to, at or after the effective time of the Arrangement as a result of any and all interests, rights, liabilities and other matters relating to the assets transferred by Old Lorus to New Lorus pursuant to the Arrangement; and (iii) prior to or at the effective time of the Arrangement and directly or indirectly relating to, with certain exceptions, any of the activities of Old Lorus or the Arrangement.
 
There have been no claims under this indemnification to date.
 
Terminated US financing
 
In April 2010, the Company filed a Registration Statement on Form F-1 with the SEC for an offering of up to US$17.5 million of units in the United States. In August 2010, subsequent to year end, the Company announced that due to unfavourable market conditions the F1 would be withdrawn and the public financing would not proceed.
 
The Company incurred fees of approximately $569 thousand related to this filing which have been included in general and administrative expenses for the year ended May 31, 2010 and an additional $200 thousand in fees incurred subsequent to year end which will be paid in the year ended May 31, 2011.
 
Share Consolidation
 
In accordance the authority granted by shareholders at the Company’s annual and special meeting on November 30, 2009 to permit it to implement a consolidation of the Company’s outstanding common shares in a ratio of between 1-for-10 and 1-for-50 at any time prior to November 30, 2010, the Company’s Board of Directors approved a 1-for-30 share consolidation which became effective May 25, 2010. The share consolidation affects all of Lorus’ common shares, stock options and warrants outstanding at the effective time. Fractional shares were not issued. Prior to consolidation the Company had approximately 298 million shares outstanding. Following the share consolidation, Lorus has approximately 9.9 million common shares outstanding. Similarly, prior to consolidation, the Company had approximately 20.2 million stock options and 36.9 million warrants to purchase common shares outstanding. Following the share consolidation, the Company had approximately 673 thousand stock options and 1.3 million warrants to purchase common shares outstanding.
 
In this Annual Report, all references to number of shares, stock options and warrants in the current and past periods unless otherwise specified, have been adjusted to reflect the impact of the consolidation, All amounts based on the number of shares, stock options or warrants, such as (earnings) loss per share and weighted average issuance price in the case of stock options have been adjusted to reflect the impact of the 1 for 30 share consolidation.
 
License Transactions
 
Effective April 8, 2008, we entered into a non-exclusive multinational license agreement with ZOR Pharmaceuticals, LLC formed as a subsidiary of Zoticon Bioventures Inc. to further develop and commercialize Virulizin™ for human therapeutic applications.
 
Under the terms of the agreement, we received an upfront licensing fee of $100 thousand and a subsequent milestone payment of $170,000, and were entitled to  receive in excess of US$12 million in milestone payments based on progress through financing and clinical development, and royalties on net sales that vary from 10-20% depending on the level of sales of Virulizin™ achieved in those territories covered by the license and subject to certain other adjustments. ZOR Pharmaceuticals, LLC assumed all future costs for the development of the licensed technology.
 

 
47

 


 
At the same time, we entered into a service agreement with ZOR Pharmaceuticals, LLC to assist in the transfer of knowledge. Under this agreement, we agreed to provide ZOR Pharmaceuticals, LLC with 300 hours of consulting service during a period of 18 months.
 
In addition, we acquired a 25% equity interest in ZOR Pharmaceuticals, LLC in exchange for a capital contribution of $2,500.
 
On June 22, 2009, the Company reached a settlement with The Erin Mills Investment Corporation with respect to the purchase and settlement of the $15.0 million secured convertible debentures.
 
Under the agreement, Lorus purchased all of the convertible debentures from The Erin Mills Investment Corporation for a cash payment on close of the transaction of $3.3 million, the assignment of the rights under the license agreement with ZOR Pharmaceuticals, LLC, sale of intellectual property associated with Virulizin and sale of Lorus’ shares in its wholly owned subsidiary, Pharma Immune Inc., which holds an equity interest in ZOR Pharmaceuticals, LLC.  Under the agreement, Lorus will be entitled to 50% of any royalties received under the ZOR Pharmaceuticals, LLC license agreement and 50% of the value of any transaction completed in territories not covered by the ZOR Pharmaceuticals, LLC license agreement.  Lorus also retains a perpetual royalty free license for the animal use of Virulizin.  The Erin Mills Investment Corporation will be fully responsible for all clinical and regulatory costs associated with commercialization of Virulizin in territories not covered by the ZOR Pharmaceuticals, LLC license agreement.  Lorus will assist The Erin Mills Investment Corporation with certain agreed upon services.
 
For receipt of the intellectual property associated with Virulizin and all of Lorus’ shares in Pharma Immune Inc., The Erin Mills Investment Corporation has released all security interest in the assets of Lorus.
 
Corporate Changes
 
As discussed above, on July 10, 2007, the Company and Old Lorus completed a plan of arrangement and corporate reorganization with, among others, 6707157 Canada Inc. and Pinnacle International Lands, Inc.  As part of the Arrangement, all of the assets and liabilities of Old Lorus (including all of the shares of its subsidiaries held by it), with the exception of certain future tax assets were transferred, directly or indirectly, from Old Lorus to the Company.  Securityholders in Old Lorus exchanged their securities in Old Lorus for equivalent securities in New Lorus and the board of directors and management of Old Lorus continued as the board of directors and management of New Lorus.  New Lorus obtained substitutional listings of its common shares on both the TSX and the NSYE Amex (formerly the American Stock Exchange).  As discussed under the heading “Regulatory Matters” below, the Company voluntarily delisted from the NYSE Amex effective October 31, 2008.
 
As part of the Arrangement, the Company changed its name to Lorus Therapeutics Inc. and continued as a biopharmaceutical company, specializing in the research and development of pharmaceutical products and technologies for the management of cancer as a continuation of the business of Old Lorus.  In October 2007, Old Lorus changed its name from 4325231 Canada Inc. to Global Summit Real Estate Inc.
 
Quarterly Results of Operations
 
The selected financial information provided below is derived from the Company’s unaudited quarterly financial statements for each of the last eight quarters.
 
Revenue recognized over the past eight quarters is primarily related to milestone payments received from ZOR Pharmaceuticals, LLC for the license of Virulizin. Lorus received two milestone payments under the license agreement, one upon signing the agreement and a second upon ZOR Pharmaceuticals, LLC achieving a financing milestone. The milestone revenue was recognized over the period of a service contract period whereby Lorus agreed to provide consulting services to ZOR Pharmaceuticals, LLC. The milestone revenue was fully recognized by the end of the second quarter of 2010 as the service agreement with ZOR Pharmaceuticals, LLC expired in October 2009.
 

 
48

 


 
Research and development expenditures have been consistent over the past eight quarters with increased activity in the quarters ended February 28, 2009 and August 31, 2008. The increase in August 31, 2008 was a result of increased activity related to the LOR-2040 bladder cancer studies and LOR-253 GLP toxicity costs which were predominantly wrapped up in this quarter. Increased research and development spending in the quarter ended February 28, 2009 was due to the manufacture of LOR-253 drug.
 
General and administrative expenses have trended lower for the past year quarter over quarter due to reduced headcount, a small board of directors (and related costs) as well as an overall reduction in spending to conserve cash balances. The increase in general and administrative costs for the quarter ended May 31, 2010 was due to the write off of $569K in costs associated with a terminated financing initiative.
 
The net earnings shown in the quarter ended August 31, 2009 is related to the gain on settlement of the convertible debentures described above.
 
Cash used in operating activities was significantly lower in the quarters ended May 31, 2010, November 30, 2009 and August 31, 2009 due to increased accounts payables and accrued liabilities balances.
 
(Amounts in 000’s except for per common share data)
 
May 31,
2010
   
Feb 28,
2010
   
Nov. 30,
2009
   
Aug. 31,
2009`
   
May 31,
2009
   
Feb 28,
2009
   
Nov. 30,
2008
   
Aug. 31,
2008
 
Revenue
  $ -     $ 3     $ 79     $ 49     $ 78     $ 64     $ 39     $ 3  
Research and development expense (1)
    601       718       658       540       701       1,090       741       1,225  
General and administrative expense(1)
    1,173       515       743       533       516       775       873       794  
Net (loss) earnings
    (1,820 )     (1,343 )     (1,266 )     9,760       (1,895 )     (2,469 )     (2,284 )     (2,212 )
Basic and diluted net (loss) earnings
    per share
  $ (0.18 )   $ (0.14 )   $ (0.14 )   $ 1.14     $ (0.22 )   $ (0.29 )   $ (0.27 )   $ (0.29 )
Cash used in operating activities
  $ (271 )   $ (1,812 )   $ (651 )   $ (987 )   $ (1,394 )   $ (1,789 )   $ (2,080 )   $ (1,950 )
(1)           Prior quarter amounts have been reclassified to conform to the financial statement presentation subsequent to that date.
Earnings per share (EPS) is shown as reported as per the quarterly published financial statements. Share issuances during the second quarter result in different weighted average share numbers each quarter and as such the quarterly EPS will not total the annual EPS.
 
Outstanding Share Data
 
As at November 26, 2010, the Company had 14,103,030 common shares issued and outstanding and 4,924,623 common share purchase warrants convertible into an equal number of common shares. In addition, the Company had issued and outstanding 599,813 stock options to purchase an equal number of common shares.
 
B.           Liquidity and capital resources
 
The Company’s objectives when managing capital are to:
 
 
Ÿ
Maintain its ability to continue as a going concern in order to provide returns to shareholders and benefits to other stakeholders;
 
 
Ÿ
Maintain a flexible capital structure which optimizes the cost of capital at acceptable risk;
 
 
Ÿ
Ensure sufficient cash resources to fund its research and development activity, to pursue partnership and collaboration opportunities and to maintain ongoing operations.
 
At May 31, 2010, the capital structure of the Company consisted of equity comprised of share capital, warrants, stock options, contributed surplus and deficit. The Company manages its capital structure and makes adjustments to it in light of economic conditions. The Company, upon approval from its Board of Directors, will balance its overall capital structure through new share issuances, acquiring or disposing of assets, adjusting the amount of cash and short-term investments balances or by undertaking other activities as deemed appropriate under the specific circumstances. The Company settled its secured convertible debentures and extinguished its liability in the amount of $15.0 million for consideration consisting of cash and other assets in June 2009. The Company expects that its current capital resources will not be sufficient to carry out its research and development plans and operations for the next twelve months without further investment. (See “Liquidity and Capital Resources”)
 

 
49

 

The Company is not subject to externally imposed capital requirements and the Company’s overall strategy with respect to capital risk management remains unchanged from the year ended May 31, 2009.
 
Promissory notes
 
On August 27, 2010, subsequent to the year end, the Company announced a proposed rights offering as described above including a $4 million standby purchase agreement from a director of the Company Mr. Abramson.    Mr. Abramson also provided the Company with interim financing by way of three $500 thousand six month loans, advanced on August 11, 2010, September 13, 2010 and October 5, 2010.  The loans were unsecured, have a six-month term (or the earlier of the closing of the rights issue) and bore interest at the annual rate of 10%.  All three notes were repaid upon the close of the rights offering described above.
 
In April 2010, the Company entered into a loan agreement with a company related to a member of its Board of Directors to borrow $1 million. The loan amount, which was received on April 14, 2010, is unsecured, evidenced by a promissory note and bears interest at the annual rate of 10%. The funds were used for general working capital purposes.
 
In October 2009, the Company entered into a loan agreement with the same member of our Board of Directors to borrow $1 million. The loan amount, which was received on October 6, 2009, was unsecured, evidenced by a promissory note and bears interest at the annual rate of 10%. The principal and interest were due in six months. The principal amount of $1.0 million was applied to subscribe for Units as part of the November 27, 2009 private placement.
 
Private Placement
 
On November 27, 2009, pursuant to a private placement, the Company issued 1.366 million common shares and 683 thousand common share purchase warrants in exchange for cash consideration of $2.5 million. This amount includes the principal amount of $1.0 million originally received by way of a loan from a director on October 6, 2009 which was applied to subscribe for Units as part of the private placement. In addition, the Company issued 72 thousand brokers’ warrants to purchase an equivalent number of common shares at $2.40 until May 27, 2011. The total costs associated with the transaction were approximately $250 thousand which included the $77 thousand which represented the fair value of the brokers’ warrants. The Company has allocated the net proceeds of the private placement to the common shares and the common share purchase warrants based on their relative fair values. Based on relative fair values, $1.7 million of the net proceeds was allocated to the common shares and $545 thousand to the common share purchase warrants.
 
Rights Offering
 
On June 25, 2008, the Company filed a short-form prospectus for a rights offering to its shareholders.
 
Under the rights offering, holders of the Company’s common shares as of July 9, 2008, the record date for the rights offering, received one right for each common share held as of the record date. Each four rights entitled the holder thereof to purchase a unit of Lorus. Each unit consists of one common share of Lorus at $3.90 and a one-half common share purchase warrant to purchase additional common shares of Lorus at $4.53 per common share until August 7, 2010.
 
Pursuant to the rights offering the Company issued 951 thousand common shares and 571 thousand common share purchase warrants in exchange for cash consideration of $3.7 million. The total costs associated with the transaction were $500 thousand. The Company allocated the net proceeds of $3.2 million received from the issuance of the units to the common shares and the common share purchase warrants based on their relative fair values. The fair value of the common share purchase warrants has been determined based on an option pricing model. The allocation based on relative fair values resulted in the allocation of $2.8 million to the common shares and $417 thousand to the common share purchase warrants.
 

 
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Cash Position
 
At May 31, 2010, Lorus had cash and cash equivalents and short-term investments totalling $914 thousand compared to $5.9 million at May 31, 2009. The Company invests in highly rated and liquid debt instruments. Investment decisions are made in accordance with an established investment policy administered by senior management and overseen by the board of directors. Working capital (representing primarily cash, cash equivalents, short term investments and other current assets less current liabilities) at May 31, 2010 was a deficiency of $1.3 million as compared to a deficiency of $9.2 million at May 31, 2009 (which included the $15 million convertible debentures)).
 
We do not expect to generate positive cash flow from operations in the next several years due to additional research and development costs, including costs related to drug discovery, preclinical testing, clinical trials, manufacturing costs and operating expenses associated with supporting these activities. Negative cash flow will continue until such time, if ever, that we receive regulatory approval to commercialize any of our products under development and revenue from any such products exceeds expenses.
 
If we are able to secure additional financing, we intend to use these resources to fund our existing drug development programs and develop new programs from our portfolio of preclinical research technologies. The amounts actually expended for research and drug development activities and the timing of such expenditures will depend on many factors, including the ability of the Company to raise additional capital, the progress of the Company’s research and drug development programs, the results of preclinical and clinical trials, the timing of regulatory submissions and approvals, the impact of any internally developed, licensed or acquired technologies, our ability to find suitable partnership agreements to assist financially with future development, the impact from technological advances, determinations as to the commercial potential of the Company’s compounds and the timing and development status of competitive products.
 
As discussed above, management has forecasted that the Company’s current level of cash, cash equivalents and short-term investments will not be sufficient to execute its current planned expenditures for the next twelve months without further investment.
 
Subsequent Events
 
Subsequent to the year ended May 31, 2010, due to unfavourable market conditions, the Company withdrew a previously announced equity issue.
 
On September 27, 2010 Lorus filed a final short form prospectus in each of the provinces of Canada in connection with a distribution to its shareholders in eligible jurisdictions outside the United States of rights exercisable for units of the Company.
 
Under the Rights Offering, holders of common shares of the Company as of October 12, 2010, the record date, received one right for each common share held as of the record date. Each two rights entitled the holder thereof to purchase a unit of the Company at a price of $1.11 per unit. The subscription price of $1.11 per unit represents a discount of 10% to the volume weighted average closing price of the Company’s shares for the five trading days immediately prior to filing of the final prospectus. Each unit consists of one common share of the Company and one warrant to purchase an additional common share of the Company at a price of $1.33 until May 2012. If at any time after 6 months following November 9, 2010 the price of Lorus’ common shares on the TSX equals or exceeds $2.33 for five consecutive trading days, Lorus may call the warrants for cancellation. The expiry date for the rights offering was 5:00 P.M. (Eastern) on November 8, 2010.
 
A total of 4.2 million units of the Company at a price of $1.11 per unit were issued in connection with the rights offering. As a result of the rights offering Lorus issued 4.2 million common shares and 4.2 million common share purchase warrants.
 
In connection with the rights offering, the Company secured a standby purchase arrangement of $4 million by Herbert Abramson, one of Lorus’ directors. Mr. Abramson agreed to make an investment such that the minimum gross proceeds of the proposed rights offering would be $4 million. No fee was payable to Mr. Abramson for this commitment. In accordance with the terms of the stand-by purchase agreement, Mr. Abramson subscribed for 3.6 million of the 4.2 million units of the offering for $4.0 million.
 

 
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The Company used some of  the proceeds to repay the $1.5 million interim financing promissory notes to Mr. Abramson as well as to prepay the $1 million promissory note outstanding to Trapeze Capital Corporation, a corporation affiliated with Mr. Abramson.  The Company expects to use the remaining proceeds from the offering to fund research and development activities and for general working capital purposes.  Following these transactions the Company has no debt other than trade accounts payables.
 
See also “Item 7 - Major Shareholders and Related Party Transactions.”

C.           Research and development, patents and licenses, etc.
 
Certain information concerning research and development and intellectual property is set forth in Item 4, “Information on the Company”.
 
D.           Trend information
 
The Company does not currently know of any significant trends that would be material to our operations.
 
E.           Off-balance sheet arrangements
 
As at May 31, 2010, we have not entered into any off-balance sheet arrangements.
 
F.           Tabular disclosure of contractual obligations
 
(Amount in ‘000s)
   
Less than
1 year
   
1-3
years
   
More than
3 years
   
Total
 
Operating leases
    129       9       -       138  
Total
    129       9       -       138  

Lorus has incurred approximately $200 thousand in costs, subsequent to the year-end, related to the postponed US financing which are owed despite the termination of the proposed financing.
 
In addition, the Company is party to certain licensing agreements that require it to pay a proportion of any fees that it may receive from future revenues or milestone payments. As of May 31, 2010 no amounts have been received by the Company relating to these licensing agreements and therefore, no amounts are owing and the amount of future fees is not determinable.
 
The Company has entered into various consulting agreements that upon execution of a partnership agreement could result in liabilities owing to such consultants. The amounts payable in these agreements are contingent on the amounts receivable by Lorus under such partnership agreements. As of May 31, 2010 no amounts were owing and the amount of future fees payable to the consultants are not determinable.
 
Under the Arrangement, Lorus agreed to indemnify Old Lorus and its directors, officers and employees from and against all damages, losses, expenses (including fines and penalties), other third party costs and legal expenses, to which any of them may be subject arising out of any matter occurring:
 
 
(i)
prior to, at or after the Effective Time of the Arrangement and directly or indirectly relating to any of the assets of Old Lorus transferred to New Lorus pursuant to the Arrangement (including losses for income, sales, excise and other taxes arising in connection with the transfer of any such asset) or conduct of the business prior to the Effective Time;
 

 
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(ii)
prior to, at or after the Effective Time as a result of any and all interests, rights, liabilities and other matters relating to the assets transferred by Old Lorus to New Lorus pursuant to the Arrangement; and
 
 
(iii)
prior to or at the Effective Time and directly or indirectly relating to, with certain exceptions, any of the activities of Old Lorus or the Arrangement.
 
Lorus has recorded a liability of $100 thousand, which we believe is a reasonable estimate of the fair value of the obligation for the indemnifications provided. The liability has been reduced in the current year to $100 thousand from $150 thousand due to changes in assumption resulting from the passage of time. There have been no claims under this indemnification to date. This amount is included on the balance sheet in Accrued Liabilities at May 31, 2010.
 
Item 6.                 Directors, Senior Management and Employees
 
A.           Directors and Senior Management
 
The following table and notes thereto provide the name, province or state and country of residence, positions with the Company and term of office of each person who serves as a director or executive officer of Lorus as at the date hereof.
 
Each director has been elected or appointed to serve until the next annual meeting or until a successor is elected or appointed.  We have an Audit Committee, a Corporate Governance and Nominating Committee and a Compensation Committee the members of each such committee are shown below.  As at May 31, 2010, our directors and executive officers, as a group, beneficially owned, directly or indirectly, or exercised control over approximately 1.6 million common shares or approximately 16% of our outstanding common shares.
 
Name and Province/State and Country of Residence
 
 
Position
 
 
Director or Officer Since
 
Directors:
   
Herbert Abramson(3) (1)
Ontario, Canada
Director
 
July 2007
 
     
Denis Burger(1)(2)
Oregon, United States
Chairman, Director
 
September 2007
 
     
Dr. Mark Vincent(3)
Ontario, Canada
Director
 
September 2007
 
     
Dr. Jim Wright(2)
Ontario, Canada
Director, former President and Chief Executive Officer
 
October 1999
 
     
Officers:
   
Dr. Aiping Young
Ontario, Canada
President and Chief Executive Officer, Director
 
October 1999
 
     
Dr. Saied Babaei
Ontario, Canada
Vice President, Business Development
 
May 2008
 
     
Dr. Yoon Lee
Ontario, Canada
Vice President Research
 
May 2008
 
     
Elizabeth Williams
Ontario, Canada
Acting Chief Financial Officer and Director of Finance
 
November 2005
 
(1)           Member of Audit Committee.
(2)           Member of the Compensation Committee.
(3)           Member of the Corporate Governance and Nominating Committee.
 

 

 
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The principal occupation and employment of each of the foregoing persons for the past five years is set forth below:
 
Herbert Abramson: Mr. Abramson is a co-founder and Chairman of Trapeze Capital Corp., an investment dealer and portfolio management company and is also Chairman of Trapeze Asset Management Inc., an affiliated investment counselling company.  Mr. Abramson is a member of the Law Society of Upper Canada and practiced corporate/securities law for 12 years before going into the investment business.
 
Dr Denis Burger:  Dr. Burger is currently Executive Chairman of Biocide, Inc. (2009 to present) and was the past Chairman, Chief Executive Officer and a director of AVI Biopharma Inc, an Oregon based biotechnology company from 1992 to March 2007. Dr. Burger is also a partner in Sovereign Ventures, a healthcare consulting and funding firm based in Portland, Oregon.  Dr. Burger received his MSc and PhD in Microbiology and Immunology from the University of Arizona.
 
Dr. Mark Vincent: Dr. Mark Vincent is the co-founder and Chief Executive Officer of Sarissa, Inc. since 2000.  Dr. Vincent is an Associate Professor of Oncology at the University of Western Ontario and a staff medical oncologist at the London Regional Cancer Program.
 
Dr. Jim Wright:  Dr. Wright is presently Chief Executive Officer of Nu Quest Bio Inc. and has been since 2006.  As of July 1, 2010 Dr. Wright has accepted a position as Adjunct Professor in the Department of Biochemistry and Biomedical sciences at McMaster University. Dr. Wright co-founded GeneSense Technologies Inc. in 1996, and served as Lorus’ President, Chief Scientific Officer and a member of the Board of Directors in October 1999 on a merger with GeneSense Technologies Inc.  In September 2006 he stepped down as the President and Chief Executive Officer of Lorus.
 
Dr. Aiping Young:  Dr. Young has been our President and Chief Executive Officer since September 21, 2006 and was a cofounder with Dr. Wright of GeneSense Technologies Inc.  Dr. Young previously held the position of Chief Operating Officer, Senior Vice President, Research and Development and Chief Technical Officer at Lorus.
 
Dr. Saied Babaei: Dr. Babaei is currently Vice-President of Business Development.  Dr Babaei joined Lorus in 2006 and has held progressive positions as Associate Director of Corporate Affairs and Director of Corporate Development.  Prior to his employment with Lorus, Dr. Babaei was the Director of Corporate Development at Northern Therapeutics Inc.
 
Dr. Yoon Lee: Dr. Lee is currently Vice President of Research. Dr. Lee has been with Lorus for ten years, most recently serving as the Director of Research.  He joined Lorus in 1999 through the merger with GeneSense Technologies Inc., where he was a Research Scientist integrally involved in the development of GeneSense Technologies Inc. oligonucleotide therapeutics program.
 

 
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Elizabeth Williams: Prior to joining Lorus in July 2004, Ms. Williams was an Audit Manager with Ernst and Young LLP.  Ms. Williams is a chartered accountant and has received a bachelor’s degree in business administration.

There are no family relationships among the persons named above and there are no arrangements or understanding with major shareholders, customers, suppliers or others pursuant to which any person was selected as a director or member of senior management.
 
The following table outlines other reporting issuers that Board members are directors of:
 
Director
Reporting Issuer
   
Herbert Abramson
St Andrew Goldfields Ltd.
Denis Burger
Trinity Biotech plc
BioCurex, Inc.
Mark Vincent
 -
Jim A. Wright
 -
Aiping Young
 -

B.           Compensation
 
Summary of Executive Compensation
 
The following table details the compensation information for the most recent fiscal year of the Corporation, for the President and Chief Executive Officer, the Director of Finance and Acting Chief Financial Officer, the Vice President of Business Development and the Vice President of Research (“named executive officers”).  The figures are in Canadian dollars.
 
Summary Compensation Table
 
         
Non-equity incentive plan compensation
 
Name and Principal Position
Fiscal
Year
Salary
($)
Share-based
awards
($)
Option-based
awards(1)
 ($)
Annual
incentive plans
($)
Long-term
incentive plans
Total
Compensation
($)
               
Dr. Aiping Young
President and Chief Executive Officer
2010
 
336,480
N/A
70,500
129,792
Nil
536,772
Ms. Elizabeth Williams
Director of Finance, Acting Chief Financial Officer(2)
2010
 
16,319
 
N/A
7,050
11,933
 
Nil
 
35,299
Dr. Saied Babaei
Vice President Business Development
2010
155,951
 
N/A
21,150
29,630
 
Nil
 
206,731
Dr. Yoon Lee
Vice President Research
2010
 
132,810
 
N/A
21,150
25,632
 
Nil
 
179,592
1.
In determining the fair value of these option awards, the Black-Scholes valuation methodology was used with the following assumptions: (i) expected life of five years; (ii) volatility of 83%; (iii) risk free interest rate of 2.51%; and (iv) no dividend yield.
 
2.
Ms. Williams was on maternity leave from July 2009 to June 2010.
 

 
55

 


 
   
Annual Compensation
Long-Term
Compensation
Awards
 
Name and Principal Position
Fiscal
Year
Salary
($)
Bonus
($)
Other Annual
Compensation
($)
Securities Under
Options/SARs
Granted
(#)(1)
All Other
Compensation
($)
             
Dr. Aiping Young
President and Chief Executive Officer
2010
336,480
129,792
 
Nil
50,000
Nil
Ms. Elizabeth Williams (2)
Director of Finance, Acting Chief Financial Officer
2010
16,319
11,933
 
Nil
5,000
Nil
Dr. Saied Babaei
Vice President, Business Development
2010
155,951
29,630
 
Nil
15,000
Nil
Dr. Yoon Lee
Vice President, Research
2010
132,810
 
25,632
 
Nil
15,000
Nil
(1)
Number of stock options granted during fiscal 2010.  These options were granted on July 16, 2009 at a price of $2.10 and have a ten-year life.
 
Directors’ Compensation
 
The following table details the compensation received by each Director for the year ended May 31, 2010:
 
Name
Fees
earned
($)
Share-based
awards
($)
Option-based
awards
($)(3)
All Other
Compensation
($)
Total
Compensation
($)
Mr. Herbert Abramson
37,500
Nil
9,750
Nil
47,250
Dr. Denis Burger(2)
74,040
Nil
19,500
Nil
93,540
Mr. Georg Ludwig(2)(1)
20,603
Nil
9,750
Nil
30,353
Dr. Mark Vincent
29,000
Nil
9,750
Nil
38,750
Dr. Jim Wright
29,500
Nil
9,750
Nil
39,250

(1)
Mr. Ludwig resigned from the Board of Directors on March 4, 2010.
(2)
Non-Canadian directors were paid in U.S. dollars. The amounts disclosed above are in Canadian dollars converted from U.S. dollars at rates prevailing at the time of payment (December 1, 2009 - 1U.S.$ = CDN.$1.0432, January 7, 2010 - 1U.S.$ = CDN.$1.0525, April 14, 2010 - 1U.S.$ = CDN.$1.0435).
(3)
In determining the fair value of these option awards, the Black-Scholes valuation methodology was used with the following assumptions: (i) expected life of five years; (ii) volatility of 114%; (iii) risk free interest rate of 2.44%; and (iv) no dividend yield.
 
During the fiscal year ended May 31, 2010, each director who was not an officer of the Corporation was entitled to receive 150,000 stock options (the Chair received 300,000) and, at their election, common shares, deferred share units and/or cash compensation for attendance at the board of directors of the Corporation committee meetings. Compensation consisted of an annual fee of $15,000 (the Chair received $35,000) and $1,500 per Board meeting attended ($4,500 to the Chair of a Board meeting). Members of the Audit Committee received an annual fee of $8,000 (the Chair received $10,000). Each member of the Compensation Committee and Corporate Governance and Nominating Committee received an annual fee of $5,000 per committee. Board members (including the Chair) receive $500 for meetings held via conference call. There have not been any changes to the fees from the prior year. Non-executive directors are reimbursed for any out-of pocket travel expenses incurred in order to attend meetings.
 

 
56

 


 
On December 3, 2009, stock options to purchase 30,000 common shares at a price of $2.40 per share expiring December 2, 2019 were granted, in aggregate, to our directors. These options vested 50% upon issuance and the remaining 50% will vest after one year.
 
Directors are entitled to participate in our Deferred Share Unit Plan. See “Equity Compensation Plans - Directors’ and Officers’ Deferred Share Unit Plan”. None of our directors participated in this plan in the years ended May 31, 2010 or 2009.
 
Management Contracts
 
Under the employment agreement with President and Chief Executive Officer of the Corporation, Dr. Aiping Young, dated September 21, 2006, Dr. Young’s salary for fiscal 2010 was $336,500. This agreement provides for a notice period equal to 18 months plus one additional month for each year of employment under the agreement in the event of termination without cause or a resignation. If within 18 months of a change of control of Lorus, Dr. Young’s employment is terminated without cause or if she terminates the agreement with good reason as defined in the agreement, then she is entitled to receive the equivalent of two years’ of her basic salary plus one month salary for each year under the agreement, plus an annual bonus prorated over the severance period (based on the bonus paid in respect of the last completed fiscal year).
 
Dr. Young will also be entitled to benefits coverage for the severance period or a cash payment in lieu thereof. The employment agreement provides that the Corporation may at any time assign Dr. Young to perform other functions that are consistent with her skills, experience and position within the Corporation. Dr. Young reports directly to the Board. The bonus and options allocation of the President and Chief Executive Officer is determined by the Board and is awarded based 100% on achievement of corporate objectives. Dr. Young is entitled to five weeks annual vacation prorated to reflect a period of employment less than a full calendar year.
 
Under the employment agreement with Director of Finance of the Corporation, Ms. Elizabeth Williams, dated May 31, 2004, Ms. Williams’ salary for fiscal 2010 was $66,500. Ms Williams currently provides services on a part-time basis.  This agreement provides for a notice period equal to the greater of one month and the applicable notice entitlement under employment legislation in the event of termination. Ms. Williams reports to the Chief Executive Officer. The bonus and options allocation of the Director of Finance is as recommended to the Board by the Chief Executive Officer. Ms Williams is entitled to four weeks of paid vacation, pro rated to reflect a period of employment less than a full calendar year.
 
 Under the employment agreement with Vice President, Business Development of the Corporation, Dr. Saied Babaei, dated May 5, 2008; Dr. Babaei’s salary for fiscal 2010 was $156,000. This agreement provides for a notice period equal to 4 months plus one additional month for each year of employment, to a maximum of 12 months. Dr. Babaei reports to the Chief Executive Officer. The bonus and options allocation of the Vice President, Business Development is as recommended to the Board by the Chief Executive Officer. Dr. Babaei is entitled to four weeks of paid vacation, pro rated to reflect a period of employment less than a full calendar year.
 
Under the employment agreement with Vice President of Research of the Corporation, Dr. Yoon Lee, dated May 5, 2008, Dr. Lee’s salary of for fiscal 2010 was $133,000. This agreement provides for a notice period equal to 4 months plus one additional month for each year of employment, to a maximum of 12 months. Dr. Lee reports to the Chief Executive Officer. The bonus and options allocation of the Vice President of Research is as recommended to the Board by the Chief Executive Officer. Dr. Lee is entitled to five weeks of paid vacation, pro rated to reflect a period of employment less than a full calendar year.
 
Salary and bonus amounts for each of the Named Executive Officers paid during the fiscal year 2010 were as set out in the above Summary Compensation Table.
 

 
57

 

Equity Compensation Plans
 
The following table sets forth certain details as at the end of the fiscal year ended May 31, 2010 and at November 26, 2010 with respect to compensation plans pursuant to which equity securities of the Company are authorized for issuance.
 
 
Number of Shares
to be issued upon
exercise of
outstanding options
 
 
 
(a)
 
Number of Common shares
remaining available for
future issuance under the
equity compensation plans
(Excluding Securities reflected
in Column (a))
(c)
Total Stock Options
outstanding and
available for Grant
 
 
 
(a) + (c)
Plan Category
Number
% of Common
shares
outstanding
Weighted-
average
exercise price of
outstanding options
(b)
Number
% of Common
shares
outstanding
Number
% of Common
shares
outstanding
               
Equity compensation plans approved by Shareholders
599,813
4.3%
$6.78
1,515,641
10.7%
2,115,454
15.0%

 
Stock Option Plans
 
The stock option plans were established to advance the interests of Lorus by:
 
 
Ÿ
Providing Eligible Persons (as defined below) with additional incentives;
 
 
Ÿ
Encouraging stock ownership by Eligible Persons;
 
 
Ÿ
Increasing the interest of Eligible Persons in the success of Lorus;
 
 
Ÿ
Encouraging Eligible Persons to remain loyal to Lorus; and
 
 
Ÿ
Attracting new Eligible Persons to Lorus.
 
Our original stock option plan was established in 1993 pursuant to our 1993 Stock Option Plan (the “1993 Plan”); however, due to significant developments in the laws relating to share option plans and our then future objectives, in November 2003 we created the 2003 Stock Option Plan (the “2003 Plan”), ratified by our Shareholders, pursuant to which all future grants of stock options would be made.
 
The Compensation Committee as authorized by the Board administers our stock option plans (collectively the “Stock Option Plans”).
 
The 1993 Plan
 
Under the 1993 Plan, options were granted to directors, officers, consultants and employees of the Corporation or its subsidiaries (“Eligible Persons”). The total number of options issued under the 1993 Plan is 27,450. This represents 0.2% of the Company’s issued and outstanding capital as at November 26, 2010. There were no further option grants made under the 1993 Plan after November 2003. Therefore, no further options are issuable under the 1993 Plan. The total number of common shares issuable under actual grants pursuant to the 1993 Plan is 27,450 being 0.2% of the Company ‘s issued and outstanding capital as at November 26, 2010.
 
The number of common shares issuable to insiders, at any time, under the 1993 Plan and any other compensation arrangement of the Corporation cannot exceed 10% of the issued and outstanding common shares of the Corporation. The number of shares issued to insiders, within any one year period, under the 1993 Plan and any other compensation arrangement of the Corporation cannot exceed 10% of the issued and outstanding common shares of the Corporation. The maximum percentage of common shares reserved for issuance to any one person is 5% of the issued and outstanding common shares of the Corporation. The exercise price of options granted under the 1993 Plan was established by the Board on the basis of the closing market price of common shares of the Corporation on the TSX on the last trading day preceding the date of grant. If such a price was not available, the exercise price was to be determined on the basis of the average of the bid and ask for the common shares on the TSX on the date preceding the date of grant. The Board determined the vesting period of options at the time of granting the option. The term of options granted under the 1993 Plan and outstanding as of October 7, 2004 is 10 years from the date of grant.
 

 
58

 


 
If an option holder ceases to be an officer, director, continuing consultant or employee of the Corporation or a subsidiary, each unexpired, vested option may be exercised within three months of the date of cessation. In the event of the death of an optionee, each unexpired, vested option may be exercised within nine months of the option holder’s date of death.
 
Options granted under the 1993 Plan are not transferable. Currently, the 1993 Plan may be amended by the Board subject to regulatory approval in certain circumstances.
 
The 2003 Plan
 
Under the 2003 Plan, options may be granted to Eligible Persons. At November 26, 2010, the total number of options outstanding under the 2003 Plan is 572,363 representing 4.1% of the Corporation’s issued and outstanding capital. Options to purchase up to an additional 1,515,641 common shares, being 10.7% of common shares issued and outstanding, remain available for grant under the 2003 Plan. The total number of common shares issuable under the 2003 Plan is 2,088,004. This represents 14.8% of the Corporation’s issued and outstanding capital as at November 26, 2010. The total number of options issued under the 2003 Plan combined with those issued under the 1993 Plan and shares issued under the Alternative Compensation Plan will not exceed 15% of the common shares issued and outstanding at any time.
 
The maximum number of common shares reserved for issuance to insiders, at any time, under the 2003 Plan and any other compensation arrangement of the Corporation is 10% of the issued and outstanding common shares of the Corporation. The maximum number of common shares that may be issued to insiders, at any time, under the 2003 Plan and any other compensation arrangement of the Corporation within a 12 month period is 10% of the issued and outstanding common shares of the Corporation. The maximum number of common shares reserved for issuance to any one person is 5% of the issued and outstanding common shares of the Corporation. The exercise price of options granted under the 2003 Plan is established by the Board and will be equal to the closing market price of the common shares on the TSX on the last trading day preceding the date of grant. If there is no trading on that date, the exercise price will be the average of the bid and ask on the TSX on the last trading date preceding the date of grant. If not otherwise determined by the Board, an option granted under the 2003 Plan will vest as to 50% on the first anniversary of the date of grant of the option and an additional 25% on the second and third anniversaries after the date of grant. The Board fixes the term of each option when granted, but such term may not be greater than 10 years from the date of grant.
 
If an option holder is terminated without cause, resigns or retires, each option that has vested will cease to be exercisable thee months after the option holder’s termination date. Any portion of an option that has not vested on or prior to the termination date will expire immediately. If an option holder is terminated for cause, each option that has vested will cease to be exercisable immediately upon the Corporation’s notice of termination. Any portion of an option that has not vested on or prior to the termination date will expire immediately.
 
Options granted under the 2003 Plan are not assignable.
 
Currently, the Board may amend the 2003 Plan subject to regulatory approval, provided that the Board may not make the following amendments without the approval of Shareholders:
 
 
Ÿ
an amendment to the maximum number of common shares reserved for issuance under the 2003 Plan and under any other security based compensation arrangement of the Corporation;
 

 
59

 


 
 
Ÿ
a reduction in the exercise price for options held by insiders;
 
 
Ÿ
an extension to the term of options held by insiders; and
 
 
Ÿ
an increase in the 10% limits on grants to insiders.
 
During the period June 1, 2009 to May 31, 2010, options to purchase 189,406 common shares were granted under the 2003 Plan at exercise prices between $2.10 and $3.60 per common share. During the year ended May 31, 2010, we granted options to employees, other than executive officers of the Corporation, to purchase 41,073 common shares, being 22% of the total incentive stock options granted during the year to employees, executive officers and directors.
 
Alternative Compensation Plan
 
On November 30, 2009, after receiving shareholder approval, the Company adopted an alternate compensation plan (the “ACP”) which enables Lorus to meet its obligations to pay directors’ fees, salary and performance bonuses to certain employees in the form of common shares. The ACP permits the Corporation to, in circumstances considered appropriate by the Board of Directors (the “Board”), encourage the ownership of equity of the Corporation by its directors and senior employees (“Participants”), enhance the Corporation’s ability to retain key personnel and reward significant performance achievements while preserving the cash resources of the Corporation.
 
Under the ACP, Participants have the option of receiving director’s fees, salary, bonuses or other remuneration, as applicable (“Remuneration”) by the allotment and issuance from treasury of such number of common shares as will be equivalent
 
to the cash value of the Remuneration determined by dividing the Remuneration by the weighted average closing common share price for the five (5) trading days prior to payment date (the “5-day VWAP”). The issue price of common shares issued under the ACP is the 5-day VWAP.
 
The maximum number of common shares reserved for issuance under the ACP, when combined with the Stock Option Plans described under “Equity Compensation Plan Information” section, will not exceed 15% of the Corporation’s issued and outstanding common shares at any given time.
 
There have been no shares issued under the ACP.
 
Employee Share Purchase Plan
 
We have an Employee Share Purchase Plan (“ESPP”) with the purpose of the ESPP to assist the Corporation to retain the services of its employees, to secure and retain the services of new employees and to provide incentives for such persons to exert maximum efforts for the success of the Corporation. The ESPP provides a means by which employees of the Corporation and its affiliates may purchase common shares at a 15% discount through accumulated payroll deductions. Eligible participants in the ESPP include all employees, including executive officers, who work at least 20 hours per week and are customarily employed by the Corporation or an affiliate of the Corporation for at least six months per calendar year. Generally, each offering is of three months’ duration with purchases occurring every quarter. Participants may authorize payroll deductions of up to 15% of their base compensation for the purchase of common shares under the ESPP.
 
For the year ended May 31, 2010, a total of 3,159 common shares had been purchased by employees under the ESPP at prices per share between $2.12 and $2.85 per common share and a weighted average purchase price of $2.42. During the year ended May 31, 2010, under the ESPP, Named Executive Officers, as a group did not purchase any shares.
 

 
60

 


 
Directors’ and Officers’ Deferred Share Unit Plan
 
We have a deferred share unit plan for directors and officers (the “Deferred Share Unit Plan”). Under the Deferred Share Unit Plan, participating directors (“Participating Directors”) may elect to receive either a portion or all of their annual fees for acting as a director (“Annual Fees”) from us in deferred share units. Under the Deferred Share Unit Plan, the Compensation Committee may at any time during the period between the annual meetings of our Shareholders, in its discretion recommend the Corporation credit to each participating director who has elected under the terms of the Deferred Share Unit Plan, the number of units equal to the gross amount of the Annual Fees to be deferred divided by the fair market value of the common shares. The fair market value of the common shares is determined as the closing price of the common shares on the TSX on the day immediately preceding such recommendation by the Compensation Committee or such other amount as determined by the Board and permitted by the stock exchanges or other market(s) upon which the common shares are from time to time listed for trading and by any other applicable regulatory authority (collectively, the “Regulatory Authorities”).
 
In addition, the Participating Directors may elect under the Deferred Share Unit Plan to receive deferred share units in satisfaction for meeting fees earned by the Participating Directors as a result of attendance at meetings of the Board held between the annual meetings of our Shareholders by the credit to each Participating Director of the number of units equal to the gross amount of the meeting fees to be deferred divided by the fair market value of the common shares, being the closing price of the common shares on the TSX on the day immediately preceding the recommendation by the Compensation Committee or such other amount as determined by the Board and permitted by the Regulatory Authorities.
 
The Deferred Share Unit Plan is administered by the Board (in consultation with the Compensation Committee) and, subject to regulatory requirements, may be amended by the Board without Shareholder approval. When a Participating Director ceases to hold the position of director and is no longer otherwise employed by us, the Participating Director receives either (a) a lump sum cash payment equal to the number of deferred share units held multiplied by the then fair market value of the common shares on the date of termination, or (b) the number of common shares that can be acquired in the open market with the amount described in (a), either case being subject to withholding for income tax. The Board may terminate the Deferred Share Unit Plan any time before or after any allotment or accrediting of deferred share units thereunder.
 
Option Grants During Fiscal Year 2010
 
The following tables set forth the options granted to and exercised by each of the Named Executive Officers during the year ended May 31, 2010:
 
Option/SAR Grants During the Most Recently Completed Financial Year
 
Name and Principal Position
Securities Under
Options/SARs Granted
 
 
(#)
% of Total Options/SARs
Granted to Employees 
in Financial
Year
(%)
Exercise or Base Price
 
 
 
($/Security)
Market Value of
Securities Underlying
Options/SARs on the
Date of Grant
 ($/Security)
Expiration
Date
           
Dr. Aiping Young
President and Chief Executive Officer
50,000(1)
 
26.4
 
2.10
 
2.10
 
July 15, 2019
 
Ms. Elizabeth Williams
Director of Finance, Acting Chief Financial Officer
5,000 (1)
2.6
2.10
 
2.10
 
July 15, 2019
 
Dr. Saied Babaei
Vice President, Business Development
15,000 (1)
7.9
2.10
 
2.10
 
July 15, 2019
 
Dr. Yoon Lee
Vice President, Research
15,000 (1)
7.9
2.10
 
2.10
 
July 15, 2019
 

(1)
These options to purchase common shares are incentive options. The options only vest upon the attainment of specific undertakings based on certain corporate performance objectives; failing to achieve the undertakings will result in forfeiture on the specified deadline.  Upon achieving the specific undertakings, 50% of the options vest followed by 25% on the first anniversary and 25% on the second anniversary of the date of granting.
 
 

 
61

 


 
Incentive Compensation Plans
Outstanding Share-Based Awards and Option-Based Awards
 
The following table shows all awards outstanding to each NEO as at the financial year ended May 31, 2010:
 
 
Option-based Awards
 
   
Name
Number of securities
underlying unexercised
options
 
(#)
Option
exercise
price
 
($)
Option
expiration
date
Value of
unexercised
in-the-money
options
($) (1)
Dr. Aiping Young
 
 
 
 
 
 
 
 
 
 
1,666
833
3,776
1,888
2,500
2,500
1,250
1,250
2,500
1,250
2,500
1,250
2,500
1,250
5,000
2,500
2,500
5,833
1,250
2,916
2,500
6,944
1,250
3,472
1,666
1,666
2,500
33,333
16,333
15,000
30,000
50,000
40,000
 
75.00
9.00
48.30
9.00
28.50
28.50
9.00
9.00
28.50
9.00
9.90
9.00
36.60
9.00
35.10
9.00
23.40
23.40
9.00
9.00
23.40
23.40
9.00
9.00
7.80
9.00
9.90
8.10
8.10
6.60
6.15
3.60
2.10
Oct 10, 2010
Oct 10, 2010
Dec 17, 2010
Dec 17, 2010
Sept 17, 2011
Sept 17, 2011
Sept 17, 2011
Sept 17, 2011
July 6, 2012
July 6, 2012
Sep 24, 2012
Sep 24, 2012
July 15, 2013
July 15, 2013
Sep 7, 2013
Sep 7, 2013
July 20, 2014
July 20, 2014
July 20, 2014
July 20, 2014
July 19, 2015
July 19, 2015
July 19, 2015
July 19, 2015
Nov 30, 2015
Jan 5, 2016
July 27, 2016
Oct 5, 2016
Oct 5, 2016
July 21, 2017
Jan 14, 2018
Aug 10, 2018
July 15, 2019
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
800

 
62

 

 
 
Option-based Awards
 
   
Name
Number of securities
underlying unexercised
options
 
(#)
Option
exercise
price
 
($)
Option
expiration
date
Value of
unexercised
in-the-money
options
($) (1)
Ms. Elizabeth Williams
 
79
39
1,666
833
1,816
908
1,666
1,666
4,494
833
5,000
1,666
15,000
5,000
23.40
9.00
21.60
9.00
23.40
9.00
7.80
9.00
9.90
9.90
6.60
6.60
3.60
2.10
Jul 20, 2014
Jul 20, 2014
Nov 17, 2014
Nov 17, 2014
July 19, 2015
July 19, 2015
Nov 30, 2015
Jan 5, 2016
July 27, 2016
July 27, 2016
July 21, 2017
July 21, 2017
Aug 10, 2018
July 15, 2019
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
100
Dr. Saied Babaei
 
5,000
5,000
15,000
7,500
6.60
5.70